Beyond the un Global Compact : Institutions and Regulations 9781785605574, 9781785605581

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BEYOND THE UN GLOBAL COMPACT: INSTITUTIONS AND REGULATIONS

ADVANCES IN SUSTAINABILITY AND ENVIRONMENTAL JUSTICE Previously ADVANCES IN ECOPOLITICS Series Editor: Liam Leonard PUBLISHED UNDER SERIES TITLE ‘ADVANCES IN ECOPOLITICS’ Enterprising Communities: Grassroots Sustainability Innovations Volume 9 Edited by Anna Davies Transnational Migration, Gender and Rights Volume 10 Volume Editor: Ragnhild Sollund Series Editor: Liam Leonard PUBLISHED UNDER SERIES TITLE ‘ADVANCES IN SUSTAINABILITY AND ENVIRONMENTAL JUSTICE’ International Business, Sustainability and Corporate Social Responsibility Volume 11 Edited by Maria Alejandra Gonzalez-Perez and Liam Leonard Principles and Strategies to Balance Ethical, Social and Environmental Concerns with Corporate Requirements Volume 12 Edited by Liam Leonard and Maria Alejandra Gonzalez-Perez Environmental Philosophy: The Art of Life in a World of Limits Volume 13 Edited by Liam Leonard, John Barry, Marius de Geus, Peter Doran and Graham Parkes The Sustainability of Restorative Justice Volume 14 Edited by Paula Kenny and Liam Leonard Occupy the Earth: Global Environmental Movements Volume 15 Edited by Liam Leonard and Sya Buryn Kedzior The UN Global Compact: Fair Competition and Environmental and Labour Justice in International Markets Volume 16 Edited by Maria Alejandra Gonzalez-Perez and Liam Leonard

ADVANCES IN SUSTAINABILITY AND ENVIRONMENTAL JUSTICE VOLUME 17

BEYOND THE UN GLOBAL COMPACT: INSTITUTIONS AND REGULATIONS EDITED BY

LIAM LEONARD West Virginia University, Morgantown, WV, USA

MARIA ALEJANDRA GONZALEZ-PEREZ Universidad EAFIT, Medellin, Colombia

United Kingdom
North America
Japan India
Malaysia
China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2015 Copyright r 2015 Emerald Group Publishing Limited Reprints and permissions service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78560-558-1 ISSN: 2051-5030 (Series)

ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004. Certificate Number 1985 ISO 14001

CONTENTS LIST OF CONTRIBUTORS

ix

LIST OF TABLES

xi

LIST OF FIGURES

xiii

THE GLOBAL COMPACT: CORPORATE SUSTAINABILITY IN THE POST 2015 WORLD Maria Alejandra Gonzalez-Perez and Liam Leonard

1

INTERNATIONAL BUSINESS RISK MANAGEMENT AND THE EMERGING MARKET CRISES AS CHALLENGES FOR THE UN GLOBAL COMPACT Sylwia E. Starnawska

21

THE INSTITUTIONALIZATION OF CSR: AT THE CROSSROADS OF HOME AND HOST COUNTRIES INSTITUTIONAL SETTINGS, MULTINATIONAL CORPORATIONS, AND MULTINATIONAL INSTITUTIONS Annie Lamontagne

47

INCORPORATING VOLUNTARY STANDARDS INTO NATIONAL LAW: AN OVERVIEW OF THE SCANDINAVIAN EXPERIENCE John McNally

67

v

vi

CONTENTS

CORPORATE IMPACT ON THE ENVIRONMENT AND THE JUDICIAL DEVELOPMENT OF THE NORM OF CORPORATE SUSTAINABILITY: IMPLICATIONS FOR THE IMPLEMENTATION OF THE UN GLOBAL COMPACT Olawale Ajai

93

SUSTAINABLE PROCESSES AND PRODUCTION METHODS (PPMS) IN PRIVATE STANDARDS: A PROXY FOR TRADE BARRIERS OR DECENTRALISED MECHANISMS FOR ENVIRONMENTAL GOVERNANCE? Maria Alejandra Calle

117

ENVIRONMENTAL SUSTAINABILITY IN THE CAFTA-DR REGION: IMPACT OF THE TREATY’S ENVIRONMENTAL PROVISIONS ON COUNTRY AND MULTINATIONAL FIRM LEVEL SUSTAINABILITY Dinorah Frutos-Bencze

147

IFRS ADOPTION AND THE ENVIRONMENT: IS AFRICA CLOSING HER EYES TO SOMETHING? Uchenna R. Efobi

169

INNOVATION-DRIVEN ECONOMIC DEVELOPMENT MODEL: A WAY TO ENABLE COMPETITIVENESS IN NIGERIA Stephen O. Oluwatobi

197

GOVERNMENTS AS OWNERS: NATIONALIZATION OF INTERNATIONAL BUSINESS AND SOCIAL RESPONSIBILITY Maria Alejandra Gonzalez-Perez and Santiago Sosa

219

PUBLIC MANAGEMENT AND SMART MOBS DESPITE THE 2014 FIFA WORLD CUP IN BRAZIL: REFLECTIONS ON THE CONTEMPORARY ORGANIZATIONAL MODEL IN COMPARISON WITH THE UN GLOBAL COMPACT INITIATIVE Carlos Ota´vio de Almeida Afonso and Ricardo Vinhaes Maluf Cavalcante

233

Contents

vii

TRADE OPENNESS, FINANCIAL LIBERALIZATION, ECONOMIC GROWTH, AND ENVIRONMENT EFFECTS IN THE NORTH-SOUTH: NEW STATIC AND DYNAMIC PANEL DATA EVIDENCE Xiuping Hua and Agyenim Boateng

253

LABOUR RELATIONS AND INTERNATIONAL BUSINESS: THE DOCTRINE OF CONSTRUCTIVE DISMISSAL AND LABOUR RELATIONS IN MALAYSIA Balakrishnan Muniapan

291

ABOUT THE AUTHORS

317

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LIST OF CONTRIBUTORS Carlos Ota´vio de Almeida Afonso

National Institute of Metrology, Quality and Technology (Inmetro), Rio de Janeiro, Brazil

Olawale Ajai

Lagos Business School, Pan Atlantic University, Lagos, Nigeria

Agyenim Boateng

Glasgow School of Business & Society, Glasgow Caledonian University, Glasgow, UK

Maria Alejandra Calle

Department of International Business, Universidad EAFIT, Medellin, Colombia

Ricardo Vinhaes Maluf Federal University of Maranha˜o (UFMA), Cavalcante Sa˜o Luı´ s, Brazil Uchenna R. Efobi

School of Business, Department of Accounting, Covenant University, Ota, Nigeria

Dinorah Frutos-Bencze

Department of Economics & Business, Saint Anselm College, Manchester, NH, USA

Maria Alejandra Gonzalez-Perez

School of Business, Universidad EAFIT, Medellin, Colombia

Xiuping Hua

Nottingham University Business School, University of Nottingham, Ningbo, China

Annie Lamontagne

Center for Research and Graduate Studies on the Americas (CEPPAC), University of Brasilia, Brasilia, Brazil

ix

x

LIST OF CONTRIBUTORS

Liam Leonard

Department of Sociology, California State University, Fullerton, California, United States

John McNally

Department of Law/Environmental Research Institute, University College Cork, Cork, Ireland

Balakrishnan Muniapan

School of Business Administration, Wawasan Open University, Penang, Malaysia

Stephen O. Oluwatobi

Economics and Development Studies Department, Covenant University, Ota, Nigeria

Santiago Sosa

Universidad EAFIT, Medellin, Colombia

Sylwia E. Starnawska

School for Graduate Studies, SUNY Empire State College, Cheektowaga, NY, USA

LIST OF TABLES Chapter 2

Table 1

Table 2

Table 3

Table 4

Table 5

Chapter 7

Table 1 Table 2

Chapter 8

Table 1 Table 2 Table 3

Inward FDIs Flows, Annual in USD at Current Prices and Current Exchange Rates in Millions.. . . . . . . . . . . . . . . . . . Inward FDIs Stock, Annual in USD at Current Prices and Current Exchange Rates in Millions.. . . . . . . . . . . . . . . . . . Inward FDIs Flows as a Percentage of GDP
in the Year Prior the Crisis (t − 1), Expressed in (%), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions. . . . . . . . . . . . . . . Inward FDIs Stock as a Percentage of GDP
in the Year Prior the Crisis (t − 1), Expressed in (%), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.. . . . . . . . . . . . . . . . . . Comparison of Inward FDIs Flows, Inward FDIs Stock, and the IMF Bailout Commitment Package, During the Year of Crisis, and GDP
in the Year Prior the Crisis (t − 1), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions. . . . . . . . . . . . . . . . . . . . Sustainability Initiatives under the Market-Based Conservation Theme. . . . . . Industrial Sectors and Number Domestic Enterprises in the CAFTA-DR Region Sample. . . . . . . . . . . . . . . . . . . . Summary Statistics of Variables of Interest. . SGMM Estimation Results. . . . . . . . . . SGMM Estimation Results (Including Interactive Variable).. . . . . . . . . . . . . xi

36 38

39

40

41 160 161 182 183 185

xii

LIST OF TABLES

Table 4

SGMM Estimation Results (Including Interactive Variable).. . . . . . . . . . . . . Table A1 Rate of IFRS Adoption in Africa. . . . . . . Table A2 Some African Countries’ Colonial Linkage. . Chapter 9

Table 1 Table 2 Table 3 Table 4 Table 5 Table 6

Chapter 11 Table 1 Table 2 Chapter 12 Table 1 Table 2

Table 3

Table 4

Table 5 Table 6 Table 7

Table 8

Chapter 13 Table 1

Oil Dependence of the Economy. . . . Corruption Perception Index Ranking in 2009. . . . . . . . . . . . . . . . . Political Stability and Absence of Violence/Terrorism. . . . . . . . . . . Government Effectiveness. . . . . . . . The Level of Innovation.. . . . . . . . Tertiary School Enrollment (% Gross).

187 192 195

. . .

211

. . .

211

. . . .

212 213 213 214

. . . .

. . . .

Basic Characteristics of Organizational Models. . . . . . . . . . . . . . . . . . . . Basic Characteristics of Organizational Models in Brazil. . . . . . . . . . . . . . . . Summary Statistics. . . . . . . . . . . . . . Fixed Effects Regression of Static Panel Least Square Estimator for CO2 Per Capita in the Entire Sample. . . . . . . . . . . . . . . . . Fixed Effects Regression of Static Panel Least Square Estimator for CO2 Per Capita in the Industrial Countries Group. . . . . . . . . . Fixed Effects Regression of Static Panel Least Square Estimator for CO2 Per Capita in the Emerging and Developing Countries Group.. Dynamic GMM Estimation Results for CO2 Per Capita in the Entire Sample. . . . . . . . Dynamic GMM Estimation Results for CO2 Per Capita in the Industrial Countries Group. Dynamic GMM Estimation Results for CO2 Per Capita in the Emerging and Developing Countries Group. . . . . . . . . . . . . . . Fixed Effects Regression of Static Panel Least Square Estimator for CO2 of GDP in the Entire Sample. . . . . . . . . . . . . . . . . Analysis of Awards of Termination Cases (2005
2012).. . . . . . . . . . . . . . . . .

241 242 264 267 269 271 276 278 279 282 302

LIST OF FIGURES Chapter 2

Fig. 1

Fig. 2

Fig. 3

Fig. 4

Fig. 5

Inward FDIs Flows, Annual in USD at Current Prices and Current Exchange Rates in Millions.. . . . . . . . . . . . . . . . . . . Inward FDIs Stock, Annual in USD at Current Prices and Current Exchange Rates in Millions.. . . . . . . . . . . . . . . . . . . Inward FDIs Flows as a Percentage of GDP
in the Year Prior the Crisis (t − 1), Expressed in (%), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.. . . . . . . . . . . . . . . . . . . Inward FDIs Stock as a Percentage of GDP
in the Year Prior the Crisis (t − 1), Expressed in (%), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.. . . . . . . . . . . . . . . . . . . Comparison of Inward FDIs Flows, Inward FDIs Stock, and the IMF Bailout Commitment Package, During the Year of Crisis, Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.. . . . . .

.

37

.

38

.

39

.

40

.

42 56

Chapter 3

Fig. 1

Perception of CSR Legitimacy. . . . . . . . . .

Chapter 7

Fig. 1 Fig. 2

HDI versus EFI to Biocapacity Ratios. . . . . . 158 Percentage of GRI/EP and CSR Reporting Companies by Industrial Sector. . . . . . . . . . 161 Number of UN Global Compact Participants from the CAFTA-DR Region. . . . . . . . . . . 163

Fig. 3 Chapter 9

Fig. 1 Fig. 2

Chapter 11 Fig. 1

GDP (Constant 2005 US$ Millions).. . . . . . . 208 The Level of Innovation.. . . . . . . . . . . . . 209 Tupiniquim Public Administration. . . . . . . .

xiii

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THE GLOBAL COMPACT: CORPORATE SUSTAINABILITY IN THE POST 2015 WORLD Maria Alejandra Gonzalez-Perez and Liam Leonard ABSTRACT Purpose
This chapter examines roles and challenges for corporations in addressing Post 2015 world development objectives. Specifically it does review the contributions and opportunities of the principles of the Global Compact and other social responsibility initiatives for embedding corporate contribution to sustainable markets and societal development. Methodology/approach
The results presented in this chapter are based on analysis of secondary sources and a literature review to determine conceptual and theoretical frameworks for identifying assumptions and challenges of corporate sustainability in the Post 2015 era. Findings
It was found that although there are neither academic nor activist definitive consensuses regarding positive impacts of adopting the UN Global Compact principles for sustainability, the impacts of committed corporations, organisations and association are multiplying

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 1
19 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017001

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MARIA ALEJANDRA GONZALEZ-PEREZ AND LIAM LEONARD

societal understanding of the implications in societies, governments and markets of violating human and labour rights, degrading and not protecting the environment, and having corruption. Practical implications
This chapter could be used as teaching material for undergraduate and master courses of corporate social responsibility, business ethics, sustainability, operations management and strategy. Originality/value
This chapter discusses firms’ responsibilities regarding world development objectives in a Post 2015 world. Keywords: Sustainability; corporate social responsibility; United Nations Global Compact; Post 2015; MDGs

INTRODUCTION: NEW GLOBAL ALLIANCES TO MEET MILLENNIUM DEVELOPMENT GOALS (MDGS) POST 2015 In July 2012, the United Nations’ Secretary-General proclaimed a HighLevel panel for advising on the new global development framework after 2015. On May 2013, the panel submitted a report containing recommendations for the implementation of the MDGs. This report was the result of an international consultation process to over 5,000 organisations in different world regions and to a broad variety of social and economic sectors. One of these recommendations was the creating of a new global alliance for world poverty eradication by 2030, via transforming economics towards sustainable development, and the establishment of pillars of a sustainable development. This High-Level panel has participation of the governments of Colombia, Denmark, Indonesia, Japan, Liberia, Mexico, Netherlands, Sweden, the United Kingdom and the United States, and also counted with the contribution of (corporate) foundations such as William and Flora Hewlett, and the Ford Foundation. It also counted with the support of national networks of the Global Compact, the United Nations Development Group (UNDG), and the network for sustainable solutions for sustainable development. MDGs have eight goals (each of them with specific targets and economic indicators) that were established in 2000 at the United Nations’

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Millennium Summit, and 189 UN member states, and several nongovernmental organisations committed to achieve in the period 2000
2015. The proposed MDGs were: 1. 2. 3. 4. 5. 6. 7. 8.

Eradication of poverty and hunger Universal coverage of primary education Promotion of gender equality and women empowerment Child mortality reduction Maternal health improvement Combating HIV/malaria, and other diseases Ensuring environmental sustainability Developing a global partnership for development

Since the adoption of the eight MDGs in 2000, substantial progress has been made, such as the reduction of 30% in child mortality, 25% of deaths due to malaria; and over 500 million people overcome the poverty line (less than USD $1.25 per day). However, over 1,200 million people in the world still live in extreme poverty conditions. Between 2010 and 2013, assessment accomplishments of the MDGs established an unequal achievement of goals (some countries advance more towards the goals, while other countries with low financial resources and affected by internal conflicts did not manage to advance). This is why the High-level panel was created and proposed a new global alliance with a pragmatic implementation focus for specific topics such as water, hunger, garbage recollection, education and health care. Meeting these new MDGs could threaten the scientifically proven effects of climate change such as storms, floods and droughts. The High-level panel announced that the transformation required structural changes and specific actions to be implemented by 2030 such as increase forest areas from 190 to 240 million hectares, 1.2 billion people should have overcome extreme poverty conditions, 470 million workers should have decent jobs, amongst others. These identified changes that must be measured and continuously monitoring with sophisticated methodological processes of data collection and analysis are crucial to build a universal agenda. For this, the following new objectives are proposed: • Universal coverage of human rights and basic economic opportunities. • Sustainable development (social, economic and environmental) must be placed at the centre of the agenda.

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• Transformation of the economies (production and consumption) for jobs creation, and ensuring universal access to quality education, drinking water, electricity, knowledge, transportation and telecommunication. • Building peace and efficient institutions (transparent, responsible and receptive governments, to promote the State of rights, property rights, freedom of speech, open political choices and justice access). • Consolidating a dynamic new global alliance based on share responsibility, solidarity, respect and cooperation, in which participants are committed to the reduction of corruption, facilitation of transparency, financial system stability, taking actions against climate change, free and fair trade, and dissemination of technology and innovation.

CORPORATE SUSTAINABILITY AND INTERNATIONALISATION Although the concept of sustainability embodies an existential promise of societal advancement towards more equitable and prosperous planet in which the environment and cultural attainments are conserved for future generations (Dyllick & Hockerts, 2002), at the firm level the implementation and implications of responsible management are predominantly pragmatic (Filatotchev & Nakajima, 2014). The implementation of corporate responsible management entails changes at the firms’ strategy, objectives and business vision, which are not always convenient, nor immediately profitable. These changes generally transcend financial considerations or existing corporate social responsibility (CSR) initiatives and transversally connect all domestic and international business units. Embracing a responsible, transparent, and transforming management oriented towards sustainability could have positive effects (ultimately reflected in increasing competitiveness) in different organisational processes. Been perceived as social and environmental innovators may influence brand differentiation, reputational retributions, and clients and employees respect and loyalty for been responsible. Incorporating an ethical and responsible business management is related to a large extent to the aesthetics sensitivity, wisdom (Waddock, 2014) and responsive capacity (speed and accurateness of responses) to act upon needed changes to lead a firm (and its industry) to be sustainable in the long run, not only at the local level, but having in mind that companies are interdependent organisations in the global environment. A responsible and

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ethical management reflects genuine interests of the higher-level management of having a relevant business for next generations, and having at present times profits, clients satisfaction, employees’ sense of belongings and social legitimacy where the company operates. Furthermore, an ethical manager is recognised for communicating in a transparent way to her/his team the value of ‘doing things in the right way’ in ethical terms. As a consequence of this, organically financial profits are going to be reflected. Besides, an ethical manager is also known for having visible ethical practices that are perceived as social models in the company. Traditionally, a responsible managerial leadership has been based on values, and implied shared ideals on societal wellbeing (moral decisions and accountability), and the ability of cultivating sustainable relationships with stakeholders in order to meet business objectives (Hibbert & Cunnlife, 2013). Furthermore, to the irresponsible managerial behaviour is attributed lack of respect and concern for others (at collective and individual level) wellbeing (Lange & Washburn, 2012). There are several questions for academics, policy makers and business leaders regarding the relationship between CSR, sustainability and internationalisation without definitive answers. For instance: • Does a firm engage into a social and environmental sustainability agenda in order to increase social legitimacy in targeted international markets and host countries? • How compatible are corporate objectives with social development? • What are the social responsibilities of international firms in a Post 2015 world? • Is corporate social responsibility a mechanism to align financial and non-financial results? • How labour CSR contributes to develop workers into consumers? • How adopting Global Compact principles contribute to standardise environmental and labour practices across borders? • How adopting Global principles might decrease reputational risk? Certainly there is neither theoretical nor empirical consensus of an explicit and definitive positive relationship. Some authors see CSR as an investment, since it might increase employees’ satisfaction and sense of belongingness and this affects firm’s productivity and also might positively affect consumers’ perception (Webber, 2008). Since the beginning of the 21st century, scandals for corporate irresponsible behaviour have internationally increased (Gonzalez-Perez, 2013). These scandals were enhanced by the financial crises in the United States

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and some European countries that were partially attributed to unethical management in the financial sector. Both situations have escalated economic, social and environmental concerns, which are partially, perceive to be caused by lack of ethical considerations of doing business. Since its inception in July 2000, the United Nations’ Compact has defined an agenda for business, labour and environmental groups, agencies, advocate groups and the United Nations to work together to promote a more equitable world for markets, employers and employees. At the heart of the Global Compact is found the core value of ‘global citizenship’. The UN Global Compact is currently the largest corporate citizenship international network, framework and voluntary mechanism joined (by May 2014) by over 12,300 organisations of all types around the world, half of them have joined after 2010. Driven by the reconfigured relationship between markets and societies (and increasing interactions between transnational corporations and nongovernmental organisations), corporate citizenship, corporate governance and corporate social responsibility’s initiatives have been decoded as approaches to regulate the increasing social power of transnational corporations (Costa, Botelho, & Costa, 2013; Helleiner, 2001; Kell & Ruggie, 1999; Leonard & Gonzalez-Perez, 2013; Rasche, Waddock & McIntosh, 2013; Whitehouse, 2003). The United Nations Global Compact (UNGC) is an example for evolving ‘complex multilateralism on a global level’ (Fritsch, 2008, p. 1), and possibility for implementing global multi-stakeholder governance and corporate citizenship values (Baumann-Pauly & Scherer, 2013; Utting, 2013).

THE GLOBAL COMPACT AND SUSTAINABLE SUPPLY CHAIN MANAGEMENT In recent years there has been an increasing importance in sustainable supply chain management. The functional business area of supply chain management increased its importance at the end of 1980s when firms increased their participation in international ventures, and then, including in business’ ethos and corporate objectives the importance of integrating all components of the production, logistics and marketing chains, while seeking maximising efficiency. Traditionally, one of the main objectives of the supply chain management was stock optimisation, aiming to have supplies as close to the market demand as possible. However, due to increased

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reputation risks associated with contentious corporate practices (including labour and environmental issues, and involvement in bribery and corruption), pressures by human rights and environmental advocacy groups, increasing political instability, climate change effects, consumers’ demands for responsibly produced goods, the relationship between financial performance and sustainability has become more visible into operations management. This is why, for companies operating at both domestic and international level, a voluntary implementation of a sustainable supply chain management makes both business and social sense. According to an extensive review by Seuring and Mu¨ller (2008), conceptually sustainable supply chain management is divided into supplier management for risk and performance, and supply chain management for sustainable products. Sustainability of goods and services depends on the control that firms can exercise on sustainability features of their suppliers; the alliance and engaging means firms can develop across their supply chain. For these purposes, traceability is decisive to safeguard the reliability of sustainably assertions through tracking social, environmental and financial dimensions across the entire production and supply chains. Traceability is the process of determining and tracking the components of a product or services from raw material to completed good (United Nations Global Compact, 2014a). There is evidence that the production systems and quality management schemes (such as total quality management
TQM; just in time
JIT; and lean manufacturing) improve the operational performance of the firms. As well, it has been found that the adoption and implementation of these systems increase awareness of environmental, social, and labour effects of firms’ operations. However, these are not enough to have a sustainable business. Sustainability is most commonly associated only with environmental aspects, or green markets, and less often takes into account with social aspects, or the consequences of corporation decisions and practices on the value and production chain. There is a current trend in which the results of the supply chain management should be measure not only by profits, but also should include (social, environmental and financial) impacts of the supply and production chain in societal and environmental systems (triple bottom line). To hold sustainable operations means to a firm to achieve being on the markets longer than competitors; therefore, to be sustainable a firm must at least ensure that it generates prolonged profits without hurting the people, the natural environment and the economies where the firm operates.

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MARIA ALEJANDRA GONZALEZ-PEREZ AND LIAM LEONARD

The UN Global Compact encourages companies to incorporate and promote material initiatives to integrate the 10 principles into supply chain management systems. The Global Compact together with Business of a Better World (BSR) launched in April 2014 the ‘Guide to traceability: A practical approach to advance sustainability in global supply chains’ (United Nations Global Compact, 2014). With concrete lessons from different industries, different company sizes (large transnational corporations and small business) and types (for profit, governmental and NGOs), and located in different geographic regions this guide offers companies and their stakeholders to understand, implement, develop and multiply traceability in their supply chain.

FINANCIAL MARKETS AND THE GLOBAL COMPACT Since 1990s, and progressively since corporate governance scandals, and the financial crises in the United States and some European countries, changes in public expectations are reflected in the incorporation of environmental, social and governance (ESG) considerations in the agendas of investors, activists and academics. Concepts as socially responsible investment (SRI), sustainable investment and ethical investment have been used since the 1990s with intensification with the global financial crises. In June 2004, the UN Global Compact at the UN Headquarters in New York initiated meetings with a number of global stock exchanges and proposed the initiative ‘Who Cares Wins’ for promoting investors and analysts to focus on the ESG materiality, and how these are related to climate change, anti-corruption, water and human rights. Investors and financial analysts that considered ESG criteria, avoid the inclusion in their investment portfolio industries and sector with unacceptable for ethical, financial, legal, or moral performance; and considered within their potential portfolio companies with good ESG performance. In 2009, the United Nations Conference for Trade and Development (UNCTAD) together with the Principles for Responsible Investment (PRI) hold meetings at the UN Headquarters in Geneva with stock exchanges, public policy officials, investors and financial information providers. This call for action between UNCTAD, Global Compact and PRI motivated the UN initiative: The Sustainable Stock Exchanges (SSE). For the SEE, UNCTAD has developed voluntary technical assistance for stock exchanges

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and regulators (policy who has responsibility in the implementation of sustainability report initiatives (UNCTAD, 2013)). These initiatives create market-rewarded incentives for stock exchange listed transnational corporations to increment materiality in their ESG practices, and to be transparency when reporting progress towards the 10 GC principles.

THE EQUATOR PRINCIPLES: ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT FOR PROJECTS The Equator Principles (EPs) were launched in 2003 followed the initiatives of the World Bank Group’s International Finance Institution (IFC) and nine international banks (IIED, 2014). EPs were designed to assure sustainable development in project finance, and therefore EPs could be used to signal banks’ responsible conduct (Scholtens & Dam, 2007). The financial organisations (banks) that signed the EPs can ensure to their investors and stakeholders that the projects they fund have social and environmental responsibilities. For financial firms, the adoption of the Equator Principles is the result of institutional pressures and demands for sound management and social awareness in the international financial markets (O’Sullivan & O’Dwyer, 2009; Wright & Rwabizambuga, 2006). At October 2014, there were 80 financial institutions in 34 countries that have adopted the EPs, and this covers over 70% of international project finance debt in emerging markets (Equator Principles, 2014).

PRINCIPLES FOR RESPONSIBLE INVESTMENT (PRI) Financial markets around the world have increasingly incorporated the Principles for Responsible Investment (PRI). These principles were launched at the New York Stock Exchange in April 2006, and it was specially focused to large institutional investors (e.g. pension funds). By May 2014, there were 1,258 signatories to the PRI. To become a voluntary signatory to the PRI, companies must demonstrate public commitment to responsible investment, and to ensure their interest in building more sustainable financial systems thought committing to their six principles. These principles are:

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MARIA ALEJANDRA GONZALEZ-PEREZ AND LIAM LEONARD

1. Principle 1: Incorporation of ESG issues into investment analysis and decision-making process. 2. Principle 2: Active incorporation of ESG issues into companies’ ownership policies and practices. 3. Principle 3: Appropriate disclosure on ESG issues. 4. Principle 4: Acceptance and implementation of the PRI within the investment industry. 5. Principle 5: Working together to enhance effectiveness in implementing the Principles. 6. Principle 6: Report activities and progress towards implementing the Principles.

GLOBAL COMPACT 100 (GC 100) On September 2013, the UN Global Compact in partnership with Sustainalytics launched the Global Compact 100 (GC 100) index, which is composed of 100 companies, have demonstrated leadership and commitment in the UN Global Compact’s 10 principles, and also have financial health (steady base-line profitability). Sustainalytics is a research and analysis organisation created in Canada in 1992 to serve financial institutions and investors in providing environmental, social and governance (ESG) information to support sustainable investment decision-making. The GC 100 was released at the Global Compact Leaders Summit in 2013, and during its first year (2013), the indexed companies demonstrated in investment returns of 26.4% (exceeding the global stock market) (United Nations Global Compact, 2014b).

DOW JONES SUSTAINABILITY INDEX (DJSI) Another mechanism to integrate Global Compact in the financial markets and which informs investors who are taking into consideration sustainability performance of their companies in their portfolio is the Dow Jones Sustainability Index (DJSI). The DJSI was launched in 1999, as the first global sustainability benchmark. It comprises 2,500 large companies listed on the Dow Jones Global Total Stock Market Index that have exceptional sustainability standards, and therefore at reference point for investors who are considering sustainability in their investment decisions.

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The Dow Jones Sustainability Index considered financial, environmental and social performance of companies and has into account sector-specific sustainability criteria. To be incorporated in the index, companies are assessed based on their long-term performance in the mentioned dimensions (financial, environmental and social), and on the provision of longstanding sustainability plans to address this. The DJSI has a global index, but also has specific regional and country benchmarks in Asia Pacific, Emerging Markets, North America, Australia, Eurozone 40 and Nordic. The indexing criteria are updated yearly and incorporated companies are continuously monitored through a corporate sustainability assessment.

GLOBAL COMPACT LOCAL NETWORKS (GCLNS) The Global Compact can be understood as a ‘Global Policy Network supporting ten universal principles in the areas of human rights, labour standards, environmental protection and anti-corruption’ (Gilbert & Behnam, 2013, p. 135). Since its beginning, the Global Compact rather than a regulatory approach, it has adopted an explicit learning approach to persuade corporate change (Ruggie, 2002). Local networks integrate domestic dimensions (cultural, economic, social and environmental) in their discussions and priorities. According to the Global Compact (2012) there were 101 local networks around the world. The Global Compact has established local networks in countries geographically distributed in all the continents. These networks were mostly established before 2005, with few exceptions in Australia, Republic of Korea and the United States. Local networks play a pivotal role in the governance of the Global Compact, and they have the participation of business (domestic and multinational operations operating locally) of all sizes, academic institutions, government entities and NGOs. Local network representatives meet together in the Annual Local Networks Forum that is chaired and coordinated by the Global Compact Office. Also, working in networks facilitates the progress and implementation of the 10 principles in current and potential members, and accordingly to Geog Kell, Executive Director of UN Global Compact, the initiatives and contributions of the local networks ‘provide an important base to jumpstart action and awareness on the ground’ (United Nations Global Compact, 2012).

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Almost one third of the organisations (business and non-business) that have signed the Global Compact are located in Europe, and this is followed by organisations in the United States.

GLOBAL COMPACT REPORTING INITIATIVES Communication on Progress (COP), and Communication on Engagement (COE) Organisations who have signed the Global Compact commit to publicly report every year their progress on the 10 principles. This communication on progress (COP) ought to be disclosure to stakeholders (consumers, investors, employees, etc.), and it is a mechanism to be accountable, and to demonstrate commitment to advance towards broader UN development goals. COPs also should be submitted and posted in the UN Global Compact’s website, and therefore an increasing repository of corporate practices has been built. Also, the Global Compact shares these COPs with financial markets through Bloomberg. Based on a self-assessment of the COP’s content, these are classified into GC Learner, GC Active, and GC advance. On October 2013, the Global Compact introduced a communication of engagement (COE) for nonbusiness participant organisations. For non-business organisations the COE ought to be submitted every two years (instead of annually as it is for business participants). Organisations that have failed in communicating their annual progress are expelled from the Global Compact and they are publicly exposed. By May 2014, almost 4,500 organisations from all sectors and from every continent have been expelled.

GLOBAL REPORTING INITIATIVE (GRI) The Global Reporting Initiative (GRI) is currently the most widely used voluntary corporate reporting framework for sustainability. In May 2010 at the Amsterdam Global Conference on Sustainability and Transparency, the UN Global Compact signed a partnership with GRI for aligning their initiatives aiming to advance transparency and corporate responsibility through a joint encouragement to companies to increase their sustainability

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commitments. GRI’s framework provides companies a structure their Global Compact’s annual Communication of Progress (CoP), but also integrating other dimensions of sustainability, enhancing with this the value of the COP. GRI was founded in 1997 in Boston, and it was pioneered by the Coalition for Environmentally Responsible Economics (CERES) and the Tellus Institute. The initial aim of GRI was to provide a multi-stakeholder accountability mechanism for companies’ responsible environmental behaviour. This objective was amplified to other sustainability dimensions, and social, economic and governance issues were included. The first version of GRI was launched in 2000, then in 2002 the second-generation guidelines (known as G2) were presented at the World Summit on Sustainable Development in Johannesburg, and it was embraced by the United Nations. In 2006, the third generation (G3) was launched, and it has a particular emphasis on strategic alliances with the UN Global Compact, the Organisation for Economic Co-operation and Development (OECD), the United Nations Environment Programme (UNEP), and the International Standards Office (ISO). G3 took into consideration for its development a consultancy process to over 3,000 business and civil society experts. Furthermore, G3 proposed sector-specific guidelines and provided educational and training support to potential reporters. In 2011, G3.1 was proposed and it included guidance on reporting gender, community and human rights performance. Finally in May 2013, GRI Sustainability Reporting Guidelines of fourth generation (G4) was launched. Aiming to increase comparativeness with other measures inside and outside organisations; G4 has included more universally transferable metrics on sustainability. The specific difference of the G4 in relation with the previous GRI is that it emphasises the importance of materiality. This implies that organisations in order to achieve their organisational objectives, and increase their impact on society, should focus their sustainability reports to those issues that are material to their business, and their strategic stakeholders.

PRINCIPLES FOR RESPONSIBLE MANAGEMENT EDUCATION (PRME) As one of the proactive effects to address sustainability issues, business schools around the world had to increase their responsibility training responsible managers with a higher level of awareness of the implications

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along their entire production chains of their behaviour as future business managers. For this the United Nations have supported the initiative Principles for Responsible Management Education (PRME) to catalyse required transformations in academic programmes in order to respond to current societal demands of having responsible and sustainable companies (PRME, 2011). The Global Compact identified that in order of having sustainable and social responsible managers, higher education institutions should be voluntarily involved, as they ‘help shape the attitudes and behaviours of business leaders thought business education, research, management development programmes, training, and other pervasive, but less tangible, activities, such as the spread and advocacy of new values and ideas’ (Global Compact, 2007, p. 3). The PRME were first developed in 2007 by an international task force of Deans from business schools in the United States, Latin America, Middle East and Europe; and international academic institutions (Association to Advance Collegiate Schools of Business
AACSB; European Foundation for Management Development
EDMD; the Aspen Institute Business and Society Programme, European Academy of Business and Society
EABIS; Globally Responsible Leadership Initiative
GRLI; and Net Impact) together with the UN Global Compact supported the drafting of the final document. As it was stated at the PRME launched by UN Secretary-General Ban Ki-moon ‘The Principles for Responsible Management Education have the capacity to take the case for universal values and business into classrooms on every continent.’ By 2014, there were over 500 leading business schools from over 80 countries around the planet, and more than one third of the Financial Times’ top 100 business schools are signatories to PRME.

CENSURES AND ADVOCATES TO THE UN GLOBAL COMPACT The significance of the UN Global Compact is implied through the successful private sector (mostly business) engagement with their initiatives. Recently academic, activist and policymaking debates have been raised regarding the lack of monitoring, regulation and volunteering reporting mechanisms associated to the Global Compact (Berliner & Prakash, 2014). Bandi (2007) discusses that the engagement of corporations in the international development since the 1990s has represented a shift for the United

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Nations in which the business community plays a complementary role to governments. Nonetheless, Bandi (2007) argues that the contribution of the business sector to the development agenda only provides a superficial role, since businesses are not involved in structural changes of the current system, and for some business, signing and participating in the Global Compact might be a public relations tool, disguising with this the main role of business which is profit making. Therefore, in some cases the United Nations has been perceived as a ‘blue-washing’ strategy and could be also understood as a disruption with the traditional UN position on economic policies via bring up a fresh power relationship among the UN and corporations which might weaken the legitimacy of the UN (idem). The Global Compact is a voluntary initiative and therefore ‘does not intent to either regulate or monitor participant activities’ (Kell, 2003, p. 35). However, by launching the Global Compact, UN inserted itself in the corporate responsibility ground (Rasche & Kell, 2010). According to UN Global Compact’s head Georg Kell the attributes that those who have interactively contributed to the Global Compact growth have been providing ‘continued relevance of the initiative’s underlying idea, sustained institutional leadership support, governmental support (political back-up), and operational viability’ (Kell, 2013, p. 31). The reasons why companies participated in the Global Compact and their perceived impact may vary (Arevalo, Aravid, Ayuso, & Roca, 2013). Companies participating in the GC receive both ethical and economic benefits in being part of the global initiative (Arevalo et al., 2013; Centidamar & Husoy, 2007; Fussler, Cramer, & van der Vegt, 2014). Some companies have identified that participating in the UNGC could increase network opportunities and also improve corporate image (Centidamar & Husoy, 2007). The Global Compact emerged in a context in which the international economic order (constructed after the Second World War) relied on an ideological consensus that the responsibility of the State in addressing national socio-economic needs was challenged by the presence and power of global networks of production, consumption and finances in which international business and corporate actor have a protagonist role to play in tackling socio-economic issues (Kell & Ruggie, 1999). On January 1999, UN Secretary-General Kofi Annan addressed the audience at the World Economic Forum (WEF) at Davos (Switzerland) engaging the attention of the participants and encouraging them to take action on the fragility of globalisation, the rising inequality in wealth distribution, the imbalances in governance and regulations for human rights,

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environment and social issues, and the unsustainability of the current levels of degradation of natural resources. Kofi Annan proposed a reconnection amongst expanding international markets players and core human values, suggesting that international business, governments, and all types of organisation around the world have a substantial responsibility of embracing new models of business and social responsibility networks in order to reverse the negative effects of globalisation by giving a ‘human face to the global market’. At the WEF, Kofi Annan maintained that international businesses and multinational companies could use their economic power and been high standards models in their spheres of influence for leveraging principles of human rights, labour rights and environmental protection. As part of his speech the Secretary-General suggested the role that United Nations and its agencies could play in adopting this global challenge and offered the Office of the High Commissioner for Human Rights (OHCHR), International Labour Organisation (ILO) and the United Nations Environment Programme (UNEP). The International Chamber of Commerce on 5 July 1999 adopted a statement ‘arguing for a stronger United Nations as the most sensible way forward, and pledged to work with United Nations agencies to implement the Global Compact at the corporate level’ (Kell & Ruggie, 1999, p. 105). Business, governments and civil society organisations with different points of view overwhelmingly supported the UN initiative, and the Global Compact was officially launched together with framework for action on July 2000 at the UN Headquarters in New York (Rasche & Kell, 2000). Due to different struggles, interests and social relations of power between absolutely profit driven gigantic MNEs and not-for-profit and causes motivated organisations, perceptions on the Global Compact have different criticisms (Soederberg, 2007). On one hand, it faced high-pitched criticisms and generated suspicion by non-governmental organisations, which consider that the Global Compact might be an opportunity to ‘corporate criminals’ to ‘bluewash’ their image ‘by wrapping themselves in the flag of the United Nations’ (Ruggie, 2001, p. 371), and also as a corporateled highly exclusionary neoliberal strategy to legitimate MNEs’ increasing social power (Soederberg, 2007). And on the other hand, those who support it might have disproportionate expectancies (Rasche, 2009; Ruggie, 2001; Waddock & McIntosh, 2011; Williams, 2007). Authors, such as Petersmann (2002), have call for a complementary ‘Global Compact’ incorporating organisations such as the World Trade Organisation (WTO) to integrate human, economic and political rights into the law and practice of

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these intergovernmental organisations aiming to protect human rights while reducing trade discrimination and enabling a welfare-increasing division of labour. In some countries, governments have designed and implemented corporate social responsibility policies (and laws) based on Global Compact Principles. These policies have in some cases substitute and complement domestic institutions and policies, and as measures for promoting international competitiveness of domestic businesses (Knudsen & Brown, 2015).

ACKNOWLEDGEMENT Some of the content included in this chapter is based on the chapter ‘The Global Compact’ by Maria Alejandra Gonzalez-Perez & Liam Leonard, published in the Handbook of Research on Transnational Corporations edited by Alice de Jonge and Roman Tomasic, and published by Edward Elgar Publishing Ltd.

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Rasche, A. (2009). ‘A Necessary Supplement’ What the United Nations Global Compact is and is not. Business Society, 48(4), 511
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INTERNATIONAL BUSINESS RISK MANAGEMENT AND THE EMERGING MARKET CRISES AS CHALLENGES FOR THE UN GLOBAL COMPACT Sylwia E. Starnawska ABSTRACT Purpose
The UN Global Compact promotes values of precautionary approach to environmental changes and business sustainability, which are eagerly embraced by MNCs; however the recognized emerging country risks pose a challenge for continuous commitment to those principles in the subsidiaries. Especially political and currency risks are considered significant in the subsidiaries located in the emerging markets. Therefore, those risks are often shifted to the local partners as the pursued core principle of the risk management strategies. The objective of MNCs is in fact to limit MNCs responsibility for the liabilities and losses in the emerging markets in case of market downturns, and in effect the advocated risk management practices exacerbate the severity of the emerging market crises.

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 21
46 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017009

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Methodology/approach
The chapter explores those corporate practices on the examples of numerous major international market players in case of several historical, but recent examples of the emerging market currency crises. Findings
The concerns addressed in the chapter include: the preference for local financing exposing at risk local banking sectors in the emerging markets, excessive liquidity and minimal capital commitments and investments leading to weaker currency fluctuations and resulting in private capital speculations and capital flight (to safety or to quality). The intensified global competition for international investments in form of FDIs resulted in the erosion of the capital requirements, reduced social and business infrastructure commitments requested, limited currency controls, and other components of the regulatory framework easing in the emerging markets. Other identified in the research key components of the risk management strategies applied by MNCs, destabilizing the emerging markets in financial (both fiscal and currency) crises include: intercompany payments and financing such as: transfer pricing, local sourcing and reimbursements for both tangible and intangible assets transfer. Implications
Demonstrated approach of MNCs appears ethically questionable and reflects the disparity of the bargaining powers. It also undermines the intentions of the Ten Principles of the UN Global Compact. The corporate citizenship is found difficult to dominate over the conflicting self-centered interests of MNCs operating in the emerging markets, especially in times of crises. The consideration of the noncompulsory ethically based initiative, as the alternative to the failing effectiveness of the international market regulations, requires restoration of the public and an individual value of the reputation (image, name) built on social responsibility and accountability, unfortunately so much diluted over the last two decades. Originality/value
The chapter examines the effect of MNCs risk management of their foreign operations on the crises in the emerging markets with focus on inward FDIs flows and inward FDIs stock fluctuations and debt financing. The results evidence the repetitive nature of the selfinterest driven corporate behavior. Keywords: UN Global Compact; MNCs; risk management; emerging market crises; FDIs flows; financing of foreign operations

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INTRODUCTION The major expectation is the sustainability of the MNCs, including their presence through subsidiaries in the emerging markets. MNCs are proactively responsive to environmental changes in the process of strategic management toward global sustainability. It aims at the overall sustainability of the organization, not the specific SBUs, divisions, or overseas subsidiaries. It is a very dynamic approach to the organizational position and presence on various local, regional, or sectorial markets, which might evolve as their contribution to the overall company changes over time, and becomes less or more supportive of the sustainability of the global strategy of the MNC. In order to accommodate the changes, the organizational structure and the presence are modified through expansions (e.g., M&A or FDIs) or retrenchments (e.g., spin-offs or divestitures). These organizational changes pose a major challenge though for the emerging markets, especially during currency crises. The theoretical framework of the chapter incorporates the UN Global Compact into the possible additional dimension for consideration of the MNCs decisions about risk management practices in their subsidiaries in the emerging economies. The framework combines the foreign capital flows theory, with the framework of explanation of current account imbalances during the currency crises. The chapter recognizes the impact of volatility of the international investments, the effects of shifting comparative advantage, and the characteristics of the liberalizing emerging economies exhibiting some features of crony capitalism. The purpose of the chapter is to evidence the devastating effect of sudden stops and sharp reversals of FDIs in the emerging markets during the currency crises. The UN Global Compact can significantly mitigate the negative FDIs risk management practices of MNCs contributing to the recurring currency crises, jeopardizing the sustainability of vulnerable countries, and deterring the process of their successful integration into the global economy. The chapter integrates microeconomics perspective of the international corporate finance with the macro approach of the currency policy management of the emerging markets with full recognition of the foreign country risk exposure. Therefore, the first part the chapter addresses MNCs risk management practices in their subsidiaries in the emerging markets, recognizing possible drivers of the currency crises originating from the opportunistic behavior of MNCs.

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In the second part of the chapter, the confirmation of the observed corporate polices is presented through the analysis of the FDIs during the emerging markets currency crises.

LITERATURE REVIEW MNCs Risk Management in Their Subsidiaries in the Emerging Markets The Report (2003) revealed the practices of the MNCs, especially those originating from the G7 countries, of using higher leverage and a variety of borrowing for their subsidiaries in the emerging markets in order to manage currency risk. The importance of the FDIs in the emerging markets increased, as the flows increased since 1990s to become the largest single component of net capital flows to those countries. Those relatively recent FDIs were facilitated by M&A, privatizations, and sales of distressed banking and corporate assets, attractive for the marketseeking MNCs. The flows followed cyclical patterns though, reflecting growth trends, and bursting bubbles. There was also an increasing concern about the risk associated with FDIs in some emerging markets, mostly of the regulatory nature and governance (corruption, taxation, licensing, and bureaucracy), undermining FDIs sustainability. The Report findings revealed that because of the risks perceived many parent companies restricted the amount of equity and intercompany loans to encourage subsidiaries to be self-sustaining. It limited expansion of subsidiaries to the reliance on financing from their internal returns. Effectively, for these companies, the FDIs flows to the emerging countries were generated only by reinvested earnings, rather than new equity or additional intercompany debt transactions. Taking on partners and passive investors (either foreign or local) helped spread investment risks and widened the scope of business operations (and therefore also leverage) in the emerging market. Windsor (2013) noted that economic and political costs of corruption were high. Although active national enforcement is gradually increasing in some emerging markets, still greater emphasis rests on anticorruption accords and data sources to provide practical guidance to business managers and public officials. Most of all however, businesses should define and enforce broadly applied anticorruption norms, and not engage in any form of corruption in any case, to reduce risk in long run.

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The Report (2003) evidenced that subsidiaries were also forced to rely more on local financing in the host country, transferring operating risk to the local banking system. There is much more focus nowadays on the risk management of MNCs in the emerging markets then it used to be before. As they find insurance and hedging cost prohibitive, and only with partial coverage, they resort to hedging strategies in form of greater reliance on local borrowing, foreign exchange and derivative markets, and increasingly use proxy hedges to protect against various types of risks. In case of capital-intensive FDIs, significant debt-related borrowing through intercompany and/or project loans was provided. MNCs enjoy a high degree of access to international capital markets at very competitive costs. Project loans
often collateralized by the assets of the specific project and with a claim on the revenue stream of the project
are also raised from international banks and capital markets for capital-intensive ventures in the emerging markets. Because of the perceived increased risk, global banks’ appetite for providing cross-border and project loans in support of the FDIs investment in the emerging markets declined, constraining the expansion of business by subsidiaries. Moreover, any disruptions of the complex international financing chain supporting MNCs subsidiaries in the emerging markets negatively affect the size and the scale of subsidiaries in the emerging markets. According to the Report (2003) MNCs also sought the financial backing for their subsidiaries from the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC), and other similar private sector or regional development banks, and developmental and long-term financing agencies
for strategic, as well as financial reasons. Those institutions acted as a “seal of approval” by the government and provided some indirect insurance against political risk, including adverse changes in regulation. In recent years, however this type of backing was reduced for FDIs. Although long-term FDIs can act as an automatic stabilizer, it is mostly only in cases of less risky short-term developments and turbulence. Some companies also emphasized that following the rapid expansion of FDIs in the 1990s, they were reevaluating their investments in the emerging market in light of falling profitability and greater perception of risks. Companies also used the repatriation of earnings and capital caps to control the overall growth and the capital exposure to the emerging markets. MNCs should consider more sustainable global presence through successful market entry strategies. Hume, Johnston, Argar, and Hume (2013) presented the “success and failure criteria” to identify how planning,

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patent, and partnerships are essential for successful entry in the emerging markets on the example of green and renewable technologies entering BRIC countries. Specific market research on markets, marketing functions for market entry, and market diffusion for products and process technologies such as supply chain need to be thoroughly investigated, and how these interrelate with achieving sustainability goals are essential for the successful entry. Similarly, Soboleva and Kubishin (2011) evidenced in their report on the MNCs subsidiaries in Russia that there was restructuring and lay-offs during the crisis. Between 2005 and 2009 employment in the companies with foreign capital declined in manufacturing, distribution of electricity, water and gas, mining (and this decrease was more significant than in the industry as a whole), constructing, hotel and catering business, real estate transactions, in education and other services, in the fish-catching sector (where the whole industry employment by contrast increased by almost 3%). High leverage of the subsidiaries allowed for flexibility in the reduction of the operations and capital outflows during the crisis. As investigated by Lassar, Haar, Montalvo, and Hulser (2010) on the example of supply chain management in affiliates of MNCs operating in Mexico, the risk mitigation focus increased in the global supply chains. The survey interviews conducted in 2008
2009 with 24 companies (representing automotive, electronics and computer, medical devices, and IT sectors) acknowledged that the symbiotic triad of resources, networks, and performance was a key determinant of the strategic risk management. This triad also provided them with a competitive advantage, in addition to improving operational efficiency, effectiveness, and quality. All firms had contingency plans in place and cooperated with the parent company headquarters on the tools and techniques to manage a wide variety of risk efficiently and effectively. It is evident that currency crises in the emerging markets shatter all elements of that symbiotic triad, undermine the competitive advantage of the subsidiary triggering the decision by the MNCs to pull out of the country, as it was the case of many emerging markets. Examples of MNCs operating in Brazil provided by Damodaran (2003) explained the corporate exposure to country risk, with expectation of risk premium for the extra risk taken. But the recognition of risk in the emerging markets also intensified the effort of risk management in order to still secure the extra return from the FDIs in the emerging market. As discussed by Marshall (2007) on the example of the several corporate consulting firms reports and surveys of executive officers representing MNCs operating in the emerging countries, it was shown that expansion

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into new markets required not only prudent risk management in place (with clear practices and processes), but also preparedness for crisis management, involving their foreign business arrangements, networks, and partners. The CLEAR framework was discussed including: corruption, the legal system, enforcement policy, accounting standards and practices, and regulation to reflect more complex and more risky environment of the emerging markets with convergence of business, finance, and government. Setting company principles and priorities was essential but the rule “think global act local” applied most of all in those markets. The association of risk taking with pioneering and organizational learning was explained by Garrett, Covin, and Slevin (2009). The strategy of market pioneering is conducted in the environment of high uncertainty and reflects high entrepreneurial spirit searching for new opportunities to exploit, that can be also applied to the FDIs entering into the emerging markets. That implies however a very strong focus on the risk management and contingency options of withdrawal to cut losses. The model of risk avoidance or transfer to the third party was presented by Bodein, Pugliese, and Walker (2001). Recommended risk management practices of shifting the risk included: buying insurance, using financial instruments such as derivatives, outsourcing, creating partnerships, or strategic alliances. The increased mobility of FDIs following shifts in the comparative advantage was discussed by Dowling and Cheang (2000), as a flying geese pattern moving business activity of subsidiary to be better positioned for exports in the region. Those transfers disturbed the “catching up” industrialization process in the emerging economies, and contributed to the Asian Crisis. This subsidiary location shitting pattern was also explained by the international product life cycle theory by Vernon. The research covered data in the period of 1970
1995 and addressed the Asian trade partners of Japan (Hong Kong, Korea, Singapore, Indonesia, Philippines, Malaysia, Taiwan, and Thailand). Those FDIs movement in the region created more integration and interdependence in the region causing contagion and increased severity of the crisis. Dowling and Cheang (2000) argued that if FDIs were to be valued ingredient in the economic growth, the efficient government and financial structure needed to ensure that economic growth was maintained. The dramatic outflow of capital, including FDIs, in most of the currency crises in the emerging economies was confirmed by the capital restricting stabilization polices recommended by the IMF, in most instances, as a complimentary government policy tool. In fact, currency and capital

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controls had to be introduced in many countries to supplement the IMF stabilization package of the financial assistance, as reported by Yoonbai (2010). Such capital controls helped buffer against some of the worst effects of the financial crisis in the emerging market economies. The process of financial liberalization exposed domestic financial sectors in the emerging markets to external shocks, especially the economies dominated by large short-term foreign currency debt. The potentially harmful effect of (shortterm) international capital inflows was also recognized by the IMF, especially in highly leveraged economies. As explained by Yoonbai (2010) on the example of Asian crisis “financial crises in the emerging market economies are often preceded by a large inflow of foreign capital after financial markets are liberalized. Capital inflows have also been a cause of concern since they tend to appreciate the real and nominal exchange rates, which can raise the relative prices of local goods compared to foreign goods and hurt export competitiveness.” Furthermore, he also admitted that “in principle, unrestricted capital movement can smooth consumption and augment investment and thus growth potential in the capital-importing country, while providing opportunities to increase the return on capital and to diversify for investors. Recent empirical studies indicated that these traditional claims may not hold.” Therefore, the government policy tools to control capital flows were recommended, as in fact were often used successfully in various forms. The alternative approach could stem from the ethically enforced UN Global Compact addressing sustainability, as for example Ahen and Zettinig (2013) argued that only corporate strategy which is entrenched in an ethical responsibility delivers a sustainable value and is the basis of the long-term success of the firm. They developed a framework for the firms, which want to go beyond mere survival in the 21st century, to redefine themselves with an imperative of a strategic corporate responsibility (SCR) and through a co-evolutionary process with markets and institutions as the response to the constrains of the global forces. Competitive advantage needs to be recognized as market legitimate. Similarly Gonzalez-Perez (2013a, 2013b) noted the possible role of corporate social responsibility (CSR) in mitigating the negative consequences of globalization. Still it should be mentioned though, that as illustrated by Osabuohien, Efobi, and Gitau (2013) on the example of Sub-Sahara African (SSA) countries, that strong institutional framework, especially regulatory quality and government effectiveness, would drive business policies of MNCs to comply with the tenets of corporate social responsibility (CSR) in host countries in respect to various hazards.

International Business Risk Management and Emerging Market Crises

29

There are also some benefits that MNCs can derive from the sustained commitment to the subsidiary in the emerging markets even through the time of the currency crisis. As many foreign affiliates of MNCs are financed by debt in a non-local currency the depreciation effect of the currency crisis can help them expand their activity after the crisis at the expense of the market loss of the local firms. So if they stay in the country they might have a stabilizing effect on the economy paralyzed by the credit crunch, as discussed by Desai, Foley, and Forbes (2008). Twenty-five emerging markets were studied, 15 of which experienced deprecation episode during the period of 1994
1998. Currency depreciation can induce FDIs, as there are opportunities to acquire assets during depreciations, since product market imperfections allow these acquirers to mobilize better those assets abroad in the more highly valued currency. If the affiliates are financed in the foreign currency, the revaluation of the existing debt after the currency depreciation does not constitute an inflow of new capital. Instead it makes an impression of growth of debt available to the subsidiary for the expansion of sales and assets. The same conclusions were reached by Blalock, Gertler, and Levine (2008) in the comparative study of liquidity constrains for local domestically owned firms in Indonesia after the 1997 East Asian financial crisis, which experienced drastically limited availability of local credit for them. It prevented them from taking an opportunity of the improved terms of trade. In contrast, the exporters with foreign-ownership expanded operations, took advantage of the currency devaluation, and profited from the access to overseas financing.

FDIs and the Emerging Markets Currency Crises The research focused on FDIs, as the form of the overseas investment considered long-term, and least susceptible to short-term capital flows and hot money speculations, as opposed to foreign portfolio investments or holdings in overseas publicly traded stocks. Therefore, FDIs are expected to contribute to the country local economy through the sustainable commitment in the subsidiary of MNCs. Government policies in the emerging markets usually welcome FDIs and facilitate them with favorable preferential tax incentives and assistance because of the benefits they are expected to bring in form of capital and know-how transfers, technological spillovers, and new jobs. Those benefits can translate into the economic growth of the country economy, but when the FDIs withdraw the funding, the

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immediate negative effect is devastating for the local economy. In fact the sustainability of the positive effect of FDIs is often questioned in many emerging countries. The vulnerability of the emerging economies to the currency crisis is a natural consequence of the currency risk exposure. International capital flows have a strong impact on the short-term currency transactions and result in the currency demand/supply mismatch affecting exchange rates. As observed by Blommestein and Santiso (2007) the internationalization of the financial system allowed for an excessive reliance on foreign financing (including various forms of debt) denominated in foreign exchange or linked to foreign currency (pegged or indexed) with lower maturity in the emerging markets. The emerging markets joined the global financial landscape as recipients of portfolio investments, lending, FDIs, and international M&A. It led to repetitive episodes of serious financial crises. Those were the outcomes not only of high capital mobility, but also of complex financial structures with high leverage and a fragile domestic financial sector. Capital flows prone to sudden stops became very susceptive to shifts in expectations and perceptions, besides the structural weaknesses of the emerging economies with imbalances and a vulnerable risk profile. The era of contagion was fueled by fast news transmission and increased currency mismatch exposures, which accelerated the process. The wave of bankruptcies encouraged further capital outflows and currency depreciations. Instead, enhanced stability should be recommended via more sustainable instruments of financing, so much sought by the emerging markets. Risk management requires less reliance on the borrowing and more on the sustainable long-term capital commitments in order to avoid debt runs. The ownership structure in the foreign subsidiary matters for the stabilization impact of the FDIs in the emerging enemies, as studied by Hebous and Weichenrieder (2010) on the sample of German foreign affiliates for the period of 1996
2006, divided for comparison into subsamples directed into OECD-host counties and the emerging markets-hosted. Wholly owned subsidiaries dominated in the emerging markets and evidenced higher leverage with financing facilitated by a parent company. A depreciation of the currency of the host economy makes the products of exporting firms more competitive in the international markets supporting exports. Currency depreciation increases the nominal value of debt dominated in foreign currency making it very favorable for subsidiaries highly leveraged by MNCs intercompany lending. Moreover, this policy is also tax-efficient for MNCs. Partially owned foreign subsidiaries are restrained from fully exploiting access to financing via parent company and from a tax minimizing strategy.

International Business Risk Management and Emerging Market Crises

31

A study by Sula and Willett (2009) on 35 emerging market countries and the currency crises in the period of 1990
2003 confirmed that FDIs were in fact the most stable of the three forms of the foreign capital inflow. However, the changes in the levels of FDIs such as outflows and sharp reversals called also sudden stops were also devastating for the local economies and were not fully covered by the current methodology of accounting for the FDIs-related capital flows, as investigated by Sula and Willett (2009). They observed in some cases of the crises that net outflows of FDIs occurred, but noted that even often a sizable fall in inflows caused a financing or adjustment problem. They addressed directly the problem of reversibility of capital flows arguing that FDIs could contribute to the crisis also through accelerating profit remittance or reducing the liabilities of affiliates toward their parent company. Those types of transactions would not even show as outflows because they are not classified as FDIs flows. Thus, the flows that enter the country under the disuse of FDIs may leave under the mask of other flows. Theoretically globalization and liberalization are considered to improve allocation of resources, including capital, by many studies evidenced a relatively disappointing effect of the capital inflows and outflows on the emerging economies. Yan and Yang (2012) proved on the comparative study of the industrial countries and the emerging markets in the period of 1987
2006 that foreign capital inflow, as the key contributor, resulted in much more serious current account deficit in the emerging countries as compared with the industrialized economies and led to inevitable currency crises. Similarly, Wei (2001) recognized a destructive effect of the capital outflows from the emerging economies, especially if FDIs are combined with a substantial level of international bank loans. He argued that overall capital flows to the emerging markets were very volatile as driven by sentiment shifts by international investors, overreaction to minor changes in fundamentals, momentum trading, herding, and contagion. In the period of 1980
1996 international bank loans were only 2
4 times as volatile as FDIs. Wei (2001) concluded that the emerging markets with high level of corruption were the scene of crony capitalism were, due to inherent risk, unfavorable for the local economy capital flows were attracted
shorterterm oriented and borrowing-based capital inflows. It made the country more vulnerable to the self-fulfilling expectations-type currency crisis. As evidenced by Onaran (2009) on the example of Mexico, Turkey, and Korea during the period of 1970
2003, the FDIs did not support wage increase, instead wages even collapsed after the periods of the currency crisis. In those examples the positive expectations from FDIs were not

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materialized in those countries. Bargaining power of workers fell in the currency crises and the real wage increases were suppressed by inflationary shocks and devaluations. Market-seeking FDIs had strong backward linkage to the domestic economy through downsizing impact. Efficiencyseeking FDIs could consider capital flight in the event of the reversal of the relative labor cost advantage, thus exercising downward strain on wages. The increased global competitive pressures were shifted onto labor. Dependence on global export markets and the destructive effects of speculative capital flows undermined a stable development policy in the emerging markets. In order to create sustainable development, a combination of industrial, trade policy, and income policy was required. The expectations toward MNCs as global market players are contrary to the evidence provided above. As Gonzalez-Perez (2013a, 2013b) noted that MNCs as non-state actors had been increasingly playing a role in providing welfare, as the idea of civil society opened a space for nontraditional actors to actively participate in the community. The concept of civil society with the participatory governance of societal processes implies forms of soft regulation and moral authority which transcend the role of states as enforcers. The negative effects of the currency crisis culminated in the decline of the overall economic activity and investment activity in the aftermath of the currency crises due to the balance sheet effect, including both a decline in the demand and a significant drop in the access to private capital (credit crunch). It was evidenced on the example of six major currency crises in the 1990s (Mexico, Korea, Russia, Brazil, Argentina, and Turkey) by Hale and Arteta (2009). They also found that foreign credit to private sector declined 25% in the first year after the crisis. Some research points out to the observed increased capital inflows preceding currency crises in the emerging markets, for example in the work of Furceri, Guichard, and Rusticelli (2012). It covered the period of 1970
2007. They found that especially debt-driven inflows significantly increased the probability of banking, currency, and balance-of-payment crises. Globalization and liberalization bring episodes of large capital inflows, increasing the fragility of the financial system and creating the risk of abrupt reversals in capital inflows in the emerging markets. This capital inflow bonanza translated into large exchange rates appreciations resulting in export competitiveness loss and the Dutch disease situations. The emerging economies were prone to overheating and inflationary pressures. Abrupt capital flows reversal created gaps and disequilibria in those vulnerable economies with lack of quick adjustment mechanisms leading to

International Business Risk Management and Emerging Market Crises

33

output contractions. Additionally, asset prices dramatically and excessively fell, scaring away foreign investors even further. Furceri et al. (2012) argued that what made the matter worse was that “both surges and sudden stops tend to be bunched, that is, through contagion they can take place in several countries at the same time or in short sequence. Moreover, debt, FDIs and equity portfolio inflows generally move in the same direction. Therefore, large capital inflow episodes across different types of inflows tend to occur simultaneously.” Although capital inflows did not directly lead to currency crises, sudden reversals or stops of inflow could trigger currency crises in the emerging economies if government failed to implement policies that would entail sustainability of the international flows, as demonstrated in the study of Turkey in the period of 1992
2002 by C¸imenog˘ lu and Yenturk (2005) and Go¨kkent, Moslares, and Amiel-Saenz (2003). Capital flows were extremely volatile in Turkey because of, a relative to the other emerging markets, poor performance of FDIs flows (very little inflows attracted), reliance on external financing, mostly in the form of short-term bank loans, and portfolio investments of foreigners in domestic stock market or government securities and short-term currency instruments. Turkey faced sudden reversal of capital flow and had to rely only on the IMF support. The initial capital inflow triggered domestic demand and domestic investments followed in the economy, but mostly in the non-tradable sectors, impairing the economy currency generating capacity and leading to the currency crisis. Therefore, the FDIs-led model of growth of the emerging markets was questioned as there were concerns about the sustainability of capital flows and structural problem existed in the local banking sector. The implications of the capital flow stops were also discussed by Faucette, Rothenberg, and Warnock (2005). They evidence that when the emerging market was cut off from the inflow of capital it often resulted in a currency crisis and recession. Both the effects of capital flight and sudden stops could be devastating, with accompanying current account deficits generated. The sudden stops could be also induced by panic of domestic investors contributing to capital outflows. Also Fiess and Shankar (2009) on the study of 14 countries, mainly in Latin America and East Asia in the period of 1985
2004, evidenced the strong negative effect of the capital flows stops in the occurrence of the currency crises. Adverse capital flow patterns forced central banks to abandon fixed, crawling peg or currency board regimes in favor of a managed float, letting the currency to devalue. Eichler and Maltritz (2011) went even further in their conclusion from their research, and considered the capital outflows from the emerging economies

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as triggers of the currency crises. Furukawa (2009) explored this problem of twin crises in the emerging markets
equity and currency crises at domestic and international level respectively
both exacerbating macroeconomics instability, attributing it also to the impaired price mechanism distorted by the capital inflows and subsequent capital outflows leading to crises and currency devaluation. Especially after the Asian crisis in the era of liberalization the emphasis in the emerging market currency crises investigation shifted on to the capital flow reversals, as argued by Erturk (2005). Moreover, when the devaluation risk rose with the excessive borrowing, the capital inflow declined before foreign reserves were depleted and the foreign exchange and capital movement constrains were imposed. Moral hazard played a crucial role in both the excessive credit reversals and the capital flow reversals. Liquidity preference with currency substitution created macroeconomic destabilizer in the emerging markets. Speculation and profit seeking by international investors overshadowed market rationality with abrupt awaking and reversals accompanying currency crises. The financial contagion, spillovers, and herd behavior in the international capital movements led to the strong deviation of the exchange rate from its fundamentals, triggering high exchange rate volatility
a one common feature of the recent currency crises, as claimed by Belke and Setzer (2004). Although Kamin, Schindler, and Samuel (2007) did not prove the FDIs flows as a statistically significant important explanatory variable in the forecasting models of currency crises in the emerging markets, they acknowledged however, the significant fluctuation in the FDIs and shadow movements of capital. They estimated several probit models of currency crises for 26 emerging market countries in the period of 1981
1999, in which large domestic factors and imbalances made countries vulnerable to external shock, but it were swings in the external factors that pushed those countries over the edge into currency crises. Ennajar (2004) explained the excessively elevated risk premiums by turbulent times during the Tequila crisis which were caused by sudden swing to negative market sentiment and overreactions to news and fund movements by US investors. He argued also the existence of international financial sector phenomenon as the reaction to the divergent expectations, as he tested data from 1993 to 2001 for 11 emerging markets, as compared with a sample of eight developed economies with no turbulent times observed. He confirmed that especially in the emerging markets initial sudden capital flows could result from market imperfections, lack of transparency and

International Business Risk Management and Emerging Market Crises

35

access of privileged investors to market sensitive information on the corrupt conditions.

METHODOLOGY AND FINDINGS The research focused on the analysis of the FDIs flows only. Capital flows include also, besides FDIs flows, portfolio debt and private loans (bank and other sector loans). Moreover, the analysis covers the inward FDIs portion. The outward FDIs were not considered as the importance of the MNCs based in those emerging economies was marginal in those cases. The intention was to analyze the behavior and the longevity of the capital commitments of MNCs into subsidiaries during the whole cycle of the currency crises in the emerging markets. Inward FDIs into the emerging economies are the most important from the UN Global Compact perspective. Those capital flows are meant to be sustainable as they are overseas investments reflecting long-term objectives of MNCs. By nature of the FDIs, they are relatively least liquid from all capital flows and therefore are most prone to remain in the country of destination. MNCs are more likely than other groups of international investors (especially more than speculators) to respond rationally and positively if facilitated by host governmental policies of the emerging countries to advocated by the Principles of the UN Global Compact, in order to foster sustainability of overseas subsidiaries formed as FDIs. In order to verify a long-term character of the inward FDIs, both the inward FDIs flows and the inward FDIs stock changes were analyzed. The selected examples covered eight different emerging economies, which experienced severe currency crises in the period of last 20 years 1994
2014. The sample was representative and fully comprehensive for the period of the analysis. Additionally, the depth of the currency crises was confirmed by the stabilization package those governments received from the IMF. The data on the IMF financial commitments was derived from the IMF website. The stabilization package represented the total commitment of the IMF provided in various forms of assistance during the crisis. The data on the FDIs flows and the FDIs stock, and the GDP levels were taken from the UNCTAD database. For the assessment of the impact of the FDIs on the economy the relative measure was also considered
the FDIs in a given year as a percentage of the GDP in the year just before the crisis (GDPt − 1). Due to the currency devaluations during the crisis GDP value expressed in

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dollars fell in the year of the crisis. That would give a misleading point of reference. The application of the GDP of the previous year helped maintain the consistency and comparability in the analysis of the relative importance of FDIs for a particular economy. All data was annual, expressed in USD at current prices and current exchange rates, quoted in millions. The year of the crisis was denoted as (t). The whole cycle was taken in each case as a 7-year period, with three years immediately preceding the year of the crisis and three years just after the year of the crisis, respectively. As presented in Table 1 and depicted in Fig. 1, in all of the cases there was an increase of the inward FDIs inflows in the years preceding the currency crisis, already at quite elevated levels, following prior years of inflow as well. Only in case of Argentina the decline in the inward FDIs started two years prior the crisis reflecting already an extremely high level of the inwards FDIs stock measured as a percentage of the country GDP. So intense inward FDIs flows were excessive and exceeded the absorptive ability of the local economy. Subsequently, during the year of the crisis a dip in the annual inward FDIs flows occurred in those cases, signifying reversal or sudden stop of the inflated level. In some cases the decline was delayed and continued in the next few years or the inward the FDIs flows were maintained at the relatively mitigated levels, except for the case of Korea. Inward FDIs in Korea were extremely well shielded by a very generous IMF package, as compared to the much lower inward FDIs stock in the country. Some delay observed in the reaction of the inward FDIs to the currency crises resulted from the limited mobility of the capital commitments of this type and also from the imposed defensive capital movement restrictions by the failing governments. Table 1. Inward FDIs Flows, Annual in USD at Current Prices and Current Exchange Rates in Millions.

Argentina, 2002 Brazil, 1999 Indonesia, 1997 Korea, 1997 Mexico, 1994 Russia, 1998 Thailand, 1997 Turkey, 2001

t−3

t−2

t−1

t

t+1

t+2

t+3

23,987.7 10,791.7 2,191.0 809.0 4,761.5 2,065.7 1,369.0 940.0

10,418.3 18,992.9 4,419.0 1,775.8 4,392.8 2,579.3 2,070.0 783.0

2,166.1 28,855.6 6,245.0 2,325.4 4,388.8 4,864.6 2,338.0 982.0

2,148.9 28,578.4 4,729.0 2,844.2 10,972.5 2,761.3 3,882.0 3,352.0

1,652.0 32,779.2 (207.0) 5,412.3 9,526.3 3,309.4 7,492.0 1,082.0

4,124.7 22,457.4 (1,838.0) 9,333.4 9,185.5 2,714.2 6,106.4 1,702.0

5,265.3 16,590.2 (4,550.0) 9,283.4 12,829.6 2,748.3 3,410.1 2,785.0

International Business Risk Management and Emerging Market Crises

Fig. 1.

37

Inward FDIs Flows, Annual in USD at Current Prices and Current Exchange Rates in Millions.

The extreme case of the inward FDIs was demonstrated in Indonesia, where very substantial outflows took place after the country complete economic collapse. As presented in Table 2 and depicted in Fig. 2, the reduction in the inward FDIs stock during the crisis was even more meaningful, as it exposed less transparent actions taken by the MNCs in the endangered subsidiaries. The observed decline in the inward FDIs stock during the year of the currency crisis could have resulted partially from the currency devaluations. However, as the financing of affiliates was dominated by foreign currency denominated borrowing, the more important contributor was in form of more covered up ways of capital withdrawals reducing financial commitment in the FDIs, such as reducing external financing (including private loans), transferring liquid assets, remitting profits, reducing liabilities of affiliates toward mother companies. So not only sharp reversals or sudden stops of the inward FDIs inflows, but also reduction of the FDIs stock had severe effect on the emerging economies during the currency crisis. Sizeable output losses, during and after the crises, were also caused by reversibility and reduction of the inward FDIs stock.

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Table 2.

Argentina, 2002 Brazil, 1999 Indonesia, 1997 Korea, 1997 Mexico, 1994 Russia, 1998 Thailand, 1997 Turkey, 2001

Fig. 2.

Inward FDIs Stock, Annual in USD at Current Prices and Current Exchange Rates in Millions. t−3

t−2

62,087.8 54,846.0 16,207.5 14,850.0 30,790.0 5,601.2 15,701.3 17,400.3

67,600.5 69,721.5 20,626.5 18,220.0 35,680.0 8,144.7 17,684.4 18,183.3

t−1

t

t+1

t+2

t+3

79,503.5 43,146.4 48,262.0 52,507.3 55,138.8 99,505.4 102,330.7 122,250.3 121,948.7 100,862.5 26,871.5 31,600.5 31,393.5 29,555.5 25,060.5 25,730.0 14,170.0 22,190.0 41,850.0 43,740.0 40,600.0 33,197.7 41,129.6 46,912.0 55,810.0 13,611.9 12,911.9 18,302.7 32,204.0 52,919.0 19,705.6 13,332.8 25,481.3 31,114.0 31,118.0 18,812.0 20,316.0 18,803.0 33,219.0 38,565.0

Inward FDIs Stock, Annual in USD at Current Prices and Current Exchange Rates in Millions.

It was very important to recognize both the inward FDIs flows and the inward FDIs stock relative to the size of the economies they affect, by presenting them as a percentage of the GDP of the country in question. As it could be seen in Table 3 and Fig. 3, both, the contribution of the inward FDIs was substantial, and the magnitude of the fluctuations during the crisis was significant. Therefore, even reversals
sudden stops, not necessary outflows could cause adjustment problems for a country so heavily reliant

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International Business Risk Management and Emerging Market Crises

Table 3. Inward FDIs Flows as a Percentage of GDP
in the Year Prior the Crisis (t − 1), Expressed in (%), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.

Argentina, 2002 Brazil, 1999 Indonesia, 1997 Korea, 1997 Mexico, 1994 Russia, 1998 Thailand, 1997 Turkey, 2001

t−3

t−2

t−1

t

t+1

t+2

t+3

8.9 1.3 0.9 0.1 0.9 0.5 0.7 0.4

3.9 2.3 1.8 0.3 0.9 0.6 1.1 0.3

0.8 3.4 2.5 0.4 0.9 1.2 1.3 0.4

0.8 3.4 1.9 0.5 2.2 0.7 2.1 1.3

0.6 3.9 (0.1) 0.9 1.9 0.8 4.1 0.4

1.5 2.7 (0.7) 1.6 1.8 0.7 3.3 0.6

2.0 2.0 (1.8) 1.6 2.5 0.7 1.9 1.0

Fig. 3. Inward FDIs Flows as a Percentage of GDP
in the Year Prior the Crisis (t − 1), Expressed in (%), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.

on those considered stable and sustainable inward FDIs. However, as presented in Table 4 and Fig. 4, the reduction of the inward FDIs stock, especially during the currency crisis, constituted a severe blow to the imbalanced economy. And again, the extreme values were confirmed in the observed range, with Argentina extremely overexposed to the inward FDIs, much over a saturation point, whereas in case of Korea which was placed

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Table 4. Inward FDIs Stock as a Percentage of GDP
in the Year Prior the Crisis (t − 1), Expressed in (%), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.

Argentina, 2002 Brazil, 1999 Indonesia, 1997 Korea, 1997 Mexico, 1994 Russia, 1998 Thailand, 1997 Turkey, 2001

t−3

t−2

t−1

t

t+1

t+2

t+3

23.1 6.5 6.5 2.6 6.1 1.4 8.6 6.5

25.1 8.3 8.3 3.2 7.1 2.0 9.7 6.8

29.6 11.8 10.8 4.5 8.1 3.4 10.8 7.1

16.0 12.1 12.6 2.5 6.6 3.2 7.3 7.6

18.0 14.5 12.6 3.9 8.2 4.5 13.9 7.1

19.5 14.5 11.8 7.3 9.3 8.0 17.0 12.5

20.5 12.0 10.0 7.6 11.1 13.1 17.0 14.5

Fig. 4. Inward FDIs Stock as a Percentage of GDP
in the Year Prior the Crisis (t − 1), Expressed in (%), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.

on the lower end of the FDIs dependence, the country was caught by contagion of the Asian crisis. It was very difficult to identify the tipping point, or the maximum safeguard level in terms of the ratio of inward FDIs expressed as a percentage of GDP. Capital inflows as well as the reversals, sudden stops or even

International Business Risk Management and Emerging Market Crises

41

outflows could be triggered by a variety of internal and external reasons ranging from trivial “hot” investment region, as it was in case of “Argentina sweetheart” fueled by privatization, to completely uncontrolled panic from the “Asian flu.” The capital flows took with them not only hot money, portfolio investors, private lending, but also many MNCs pulled out subsidiaries from the affected regions. Although the effectiveness of the IMF stabilization assistance was debated, the objective was unquestioned
to assist a country economy during a currency crisis in order to support the stability of the global financial system. It was difficult to avert the outflow of hot money or speculative funds by the IMF commitment. However the IMF package should not have been serving additionally as a shield for inward FDIs taking a business risk. Inward FDIs, while taking the opportunity to pull out from the emerging market along with the announcement of the IMF involvement during the crisis, acted as the free rider collecting the excessive return for the neutralized risk. In fact, as presented in Table 5 and in Fig. 5, the IMF assistance was very sizable in comparison with even the entire inward FDIs stock in each country analyzed. Instead, inward FDIs should have been acting as a stabilizer with the sustainability objective, minimizing the need for so extensive IMF commitments. The sustainability of the inward FDIs in the emerging markets, with the increasing presence of the MNCs in the global economy, could be a decisive factor in the investment universe for the benefit of the entire financial system, and the emerging countries alike, by acting accordingly to the median voter theorem to stop the panic. Table 5. Comparison of Inward FDIs Flows, Inward FDIs Stock, and the IMF Bailout Commitment Package, During the Year of Crisis, and GDP
in the Year Prior the Crisis (t − 1), Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.

Argentina, 2002 Brazil, 1999 Indonesia, 1997 Korea, 1997 Mexico, 1994 Russia, 1998 Thailand, 1997 Turkey, 2001

Inward FDI Flowst

Inward FDI Stockt

IMF Bailoutt

GDPt − 1

2,148.9 28,578.4 4,729.0 2,844.2 10,972.5 2,761.3 3,882.0 3,352.0

43,146.4 102,330.7 31,600.5 14,170.0 33,197.7 12,911.9 13,332.8 20,316.0

21,700 41,500 15,000 21,100 17,800 22,600 4,000 20,400

268,831 843,828 249,811 573,001 503,960 404,517 182,738 266,560

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Fig. 5. Comparison of Inward FDIs Flows, Inward FDIs Stock, and the IMF Bailout Commitment Package, During the Year of Crisis, Based on Annual Data in USD at Current Prices and Current Exchange Rates in Millions.

CONCLUSIONS AND RECOMMENDATIONS Globalization is accompanied by the intensification of FDIs capital flows. At the same time we observe increased frequency of the currency crises in the emerging markets around the globe. The repetitive nature of these episodes is accompanied by the increasing flexibility of MNCs conducting business through subsidiaries internationally. Therefore, the impact of inward FDIs on the emerging markets is vital for the sustainability of the vulnerable economies, as in the past those capital flows adversely contributed to the instability of the emerging economies. Flock behavior reflecting cooperative nature of the MNCs in their subsidiaries as well exacerbates the currency crises in the emerging economies. I analyzed the full inward FDIs cycle during the currency crises in order to identify and address the unwelcome patterns to be mitigated by the UN Global Compact. The distinguished stages of the cycle included: the accelerated inflow of inward FDIs before the currency crisis, reversals called also sudden stops meaning a decline of the inflow of inward FDIs during the year of the crisis or shortly after (in next three years) as compared with the inward FDIs level in the previous year before the crisis year, in some cases even outflow of the inward FDIs reflected in the decline of the

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inward FDIs stock, and finally a resumed level of an increase of inward FDIs targeted to benefit from a privileged position of MNCs in the emerging market created by the negative effects of the crisis. The research evidenced the problem by considering both inward FDIs flows and inward FDIs stock. The emerging market economy devastated by the currency crisis can be attractive for the MNCs to expand subsidiary there as it offers: a devalued host country currency, cheaper assets, weakened local competition, and limited local sources of financing for competing businesses. Newly located MNCs subsidiaries can enjoy parent company support in gaining access to private lending (both local and international), advantageous export opportunities, and recovering local demand. The full inward FDIs cycle during the currency crises was also explained in the research by exposing international business risk management practices of MNCs. The explanation of the FDIs behavior in the emerging markets around the time of the currency crisis was complemented by linking it with the practice of MNCs of financing subsidiaries with foreign currency borrowing. The research evidenced a very cyclical foreign expansion policy of MNCs in the emerging markets, and riding by MNCs the shield of the IMF backing as they exploit opportunities for moral hazard. Such a behavior of inward FDIs can hardly be considered beneficial to those emerging markets in the long run, as it shatters sustainability of the domestic economies and domestic players in the emerging markets. Therefore, those purely opportunistic and short-term oriented behaviors of inward FDIs should be discouraged by the UN Global Compact, favoring instead competitive advantage building sustainable presence and commitment in the emerging markets. The emerging markets are by nature more prone to currency crises and the inward FDIs volatility exacerbates the problem leading to the increased cost of the IMF bailouts. The problem resolution was attempted by more restrictive government policies, but adding the ethical and CSR dimension can be very assistive as an alternative approach in the civil society. Additionally, the identified in the research incentives for FDIs sustainably in the emerging markets, even during the currency crisis, can support incorporation of the ethical reasoning and the sustainability principle from the UN Global Compact into MNCs strategies. The recognized in the research IMF stability package magnitude used as a shield for inward FDIs should be applied as an argument for more CSR-oriented and sustainable expansion of MNCs via inward FDIs in the emerging markets.

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WEBSITES http://www.imf.org http://www.telegraph.co.uk/sponsored/rbth/5308784/Economic-crisis-in-Russia-Its-tough-yesbut-its-not-1998.html http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sRF_ActivePath=P,5,27& sRF_Expanded=,P,5,27

THE INSTITUTIONALIZATION OF CSR: AT THE CROSSROADS OF HOME AND HOST COUNTRIES INSTITUTIONAL SETTINGS, MULTINATIONAL CORPORATIONS, AND MULTINATIONAL INSTITUTIONS Annie Lamontagne ABSTRACT Purpose
This chapter examines the institutional configuration of internal CSR in MNCs operating in Canada and Brazil, as well as headquarters-subsidiary relations within the institutional settings of their home and host countries. Methodology/approach
The institutional logics perspective is used as it provides a systematic approach to understanding the institutional orders at play in the development of soft policies.

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 47
66 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017010

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Findings
Whereas the institutional framework of the host country is a key factor in the regulatory and distributive spheres, the spheres of discretionary spending and soft policies are largely influenced and shaped by the MNCs through self-regulation, and may also be guided by intergovernmental institutions and NGOs. Research limitations/implications
The empirical data is limited to two case studies. It seeks to understand the multiple facets of CSR reality and produce contextual insights. Generalizations might fit better with other context communities
research subjects and the researchers who investigate them, beyond the mining industry
in a non-positivist, nonprobabilistic sense, than with other context settings within the same industry. Practical implications
The chapter concludes that institutional discourses and practices around internal CSR seek to strengthen a firm’s legitimacy. CSR does not necessarily increase the MNC’s performance when viewed in a market logic, but its operational viability can align with the corporation’s global strategy and identity. It also highlights resistance resulting from professional and community institutional logics. Originality/value
This chapter contributes to the literature on internal CSR and is original in including an MNC from the South with subsidiaries in the North. Keywords: Corporate social responsibility; multinational corporations; embeddedness; institutional logics; international regulation

INTRODUCTION In welfare economics, corporate social responsibility (CSR) is understood as an “obligation to respond to externalities created by market action” (Salazar & Husted, 2008), amongst many other non-consensual definitions (Aguinis & Glavas, 2012; Taneja, Taneja, & Gupta, 2011). It involves the social and environmental impacts of business, both external and internal to economic actors. As such, firms dedicate a portion of their CSR reports to their internal CSR practices, that is, those that affect their employees. The main focus of this chapter will be internal CSR practices as a laboratory for labor relations and work conditions. Some argue that CSR is nothing more than a human resources maximization strategy (Hanashiro, Teixeira, &

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Zaccarelli, 2007), while others see it as part of a gradual but profound transformation toward another way of doing business (Collier & Esteban, 2007). Carroll and Shabana (2010) concluded their review stating that “only when firms are able to pursue CSR activities with the support of their stakeholders can there be a market for virtue and a business case for CSR.” This chapter approaches CSR as a field of study (Crane, McWilliams, Matten, Moon, & Siegel, 2008), recognizing the ambiguities in the definition and identity of CSR, whether in academic inquiry or within the institutional infrastructure of scholarly debate, academic teaching, and the firms themselves. Although the relationship between CSR and labor issues was reviewed in a previous volume of Advances in Sustainability and Environmental Justice (GonzalezPerez, 2013), considerations around human resources risk-management strategies, buyer- versus producer-driven value chains, and the added value of ethical goods are not centrally relevant to an industry like mining. While logistic and transformation activities can be relocated where production costs are cheaper, the main operations of mining extraction are necessarily linked to a specific territory and the presence of metals. The mining boom of the 2000s also coincides with the rise of CSR in business, social, and environmental discourses (Kell, 2012). Territory-dependent extractive MNCs, often operating in faraway regions, must take into account the social conditions of local populations and comply with regulatory regimes put in place by national and sub-national institutions. MNCs in the extractive industry must therefore work closely with local and national authorities in order to secure the initial operating license and maintain a sustainable position in the regions. MNCs are not merely economic actors; they are also political actors trading off with states and other stakeholders. Their enormous power and influence also positions them as enablers of social and economic transformation (Crouch, 2012; Fligstein, 1985, 1990). CSR indexes and instruments1 encourage the alignment of business operations and strategies with human rights, labor, environmental, and anti-corruption standards. The main argument of this chapter is that whereas the institutional framework of the host country is a key factor in the regulatory and distributive spheres, the spheres of discretionary spending and soft policies are largely influenced and shaped by the MNCs through self-regulation and may also be guided by intergovernmental institutions and NGOs. We will examine the potential institutional changes brought about by the guidelines of MNCs for operations in both home and host countries. The institutional logics perspective (Thornton, Ocasio, & Lounsbury, 2012) provides a systematic approach to the analysis of the varying logics of action, based on cultural symbols and material practices,

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amongst countries of operations, as well as the understanding of the institutional orders at play in the incorporation of CSR and its variations. We therefore contribute to the growing body of literature guided by institutional logics, expanding the approach to international contexts. According to Thornton et al. (2012, p. 174), comparative studies using institutionalist approaches could unveil specific dynamics in international transfers and translations of practices. We conclude that the incorporation of internal institutional discourses and practices around CSR seek to strengthen a firm’s legitimacy and recognize its value in the host and home countries. CSR does not necessarily increase the MNC’s performance from a market logic of action, but its operational viability can align with the corporation’s global strategy and identity.

MNCS, GLOBALIZATION, AND CSR Crouch (2012) has described the critical junctures which led to the reinforcement of MNCs’ power following the 2008
2009 financial crisis, especially the role of states in their ongoing support of MNCs and as targets for the lobbying activities of MNCs. Crouch perceives the growth of CSR as the taking up of public policy-making by big corporations. There has been extensive discussion in the CSR literature of the drivers and the process of incorporation of CSR strategies and best practices (Crane et al., 2008; Post, 2013; Shamir, 2010). It stresses the need for corporations to align their business plan with their CSR strategy and be consistent (Godfrey, Merrill, & Hansen, 2009; Porter & Kramer, 2006). The most successful CSR efforts also seem to correspond to the company’s self-interest (Vogel, 2005). Human resources (HR) development, as studied in the HR and international business literature, reflects the corporate logic perspective and, by extension, the market logic as well (Aguzzoli & Geary, 2013; Macedo-Sua´rez & Schubsky, 2010). However, corporations are not perfect rational actors, as pictured in ideal-type models. This chapter builds on both the rational and social aspects of the corporation’s logic and the role of home and host countries, institutions, legislation, politics, and power.

METHOD After theoretical discussions of the field of CSR specifically and the spread of the corporation as one of the building blocks of modern world (Scott,

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2003), we adopt a moderate constructionist approach to the understanding of the institutional configuration of internal CSR and of headquarterssubsidiary relations within the institutional settings of home and host countries. Moderate constructivism recognizes both the rational and social aspects of knowledge (Lincoln & Guba, 2000). It is necessarily based on empirical data, validated by the interested community, which assesses the claims, data, and chain of arguments as acceptable to the scientific community in light of critical reasoning and background assumptions (Ja¨rvensivu & To¨rnroos, 2010). In order to illustrate theoretical arguments, this chapter will draw on empirical data from two MNCs in the extractive industry operating in two different institutional contexts: Canada and Brazil. It contributes to literature on internal CSR, an area that has received little scholarly attention until now, especially in the case of MNCs from the South with subsidiaries in the North2 (Aguzzoli & Geary, 2013; Webb, 2012). The empirical data presented in this chapter was gathered through fieldwork the author conducted in Brazil and Canada between 2012 and 2014. Concepts and processes reviewed in the CSR literature were used to orient semi-structured interviews at SteelCo and GoldCo,3 both of which are mining MNCs operating in both countries, and with external actors. The interviews were complemented by documentary research and direct observations. Questions to all interviewees addressed ideas and discourses about CSR, MNC-stated values in relation to their own experiences, CSR implementation (critical junctures), vocabularies of practice, institutional influences, cultural symbols and material practices, headquarterssubsidiary relations, power relations, employee participation, and the policies versus practices gap. SteelCo is a large Brazilian MNC that, through an internalization process over the past 10 years, has grown to become the second largest mining MNC in the world. SteelCo acquired Canadian MNC NickelCo in a major takeover in 2006. The company employs 212,400 people (including contractors) and operates in 30 countries. Its main shareholders, as well as the members of its board of directors, are Brazilian nationals. It was a stateowned enterprise between 1942 and 1997. It represents a crucial case of a Brazilian mining MNC with operations in Canada. GoldCo is a Canadian mining MNC that has operated mines abroad since its foundation in 1993. It is one of the top 10 gold producers in the world, half of which are Canadian. It employs 8,000 employees and operates in nine countries. It acquired total ownership of its Minas Gerais operations in Brazil in 2004. Its major shareholders are private institutions and funds. Both SteelCo and

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GoldCo are publicly listed companies on the NYSE and the NASDAQ, as well as on the stock exchanges of Sa˜o Paulo, Paris, Hong Kong, Madrid, and Toronto. They have published sustainability reports since 2007 and have won awards for their CSR policies and practices. Moderate constructivism represents a middle-ground approach; it allows for the incorporation of existing theories in order to strengthen case analysis while leaving room for data-driven theory generation. CSR studies can be approached using a variety of methods, and this is but one of them. It incorporates knowledge creation with the participation of the actors involved in the research process. Generalizability and transferability of conclusions might suit better other context communities
research subjects and the researchers who investigate them, beyond the mining industry
in a non-positivist, non-probabilistic sense, than other context settings within the same industry (Ja¨rvensivu & To¨rnroos, 2010). The researcher also needs to demonstrate openness and transparency in the research process in order to minimize the influence of her theoretical insight on the gathering and analysis of empirical data.

IDEAS, DISCOURSES, AND PRACTICES AROUND CSR From the moment the business community adopted the idea that CSR is here to stay and not merely a flash in the pan, changes happened in the field. Schmidt (2008) introduced the analytical framework of discursive institutionalism to explain how ideas and discourses underlie institutional change. We defend the argument that regardless of the “business case” for CSR (Carroll & Shabana, 2010), the incorporation of CSR in discourse and strategy changes the identity of corporations. However, different ideas lead to different discourses about CSR and sustain different logics of action. Whether corporations are initiating deep institutional changes or not, they might be held responsible for their coordinative and communicative speech acts (Schmidt, 2008). International organizations and initiatives focused on CSR, such as the Global Reporting Initiative (GRI) and the UN Global Compact, have elaborated comprehensive standards and sets of indicators to provide states and non-state actors with bottom-up initiatives which bring additional legitimacy, expertise, and effective means for civil society to participate in global governance. The result is a discursive struggle between self-regulation and binding regulations seeking to

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counterbalance MNCs’ self-interests, especially when these do not coincide with public good. The sources of legitimacy of market and corporation institutional orders have traditionally been the share price and the market position of the firm. When non-governmental CSR reporting tools like the GRI become formally linked to the disclosure procedures of stock exchanges, we observe that communities may be the generators of new practices (O’Mahony & Lakhani, 2011). The inclusion of community as an institutional order signals a rebound in theory after an overemphasis on institutional isomorphism and globalization (Marquis, Glynn, & Davis, 2007). The NYSE has also become the latest exchange to join the United Nations’ Sustainable Stock Exchanges (SSE) initiative, designed to promote corporate transparency and responsible investment.4 Even if stock exchange initiatives have had a decisive influence on listed companies’ disclosure behavior in regards to CSR indicators, shareholder activism nonetheless remains the central source of authority of the market logic (Thornton et al., 2012). In our case studies, Brazil has developed its own CSR framework based on the GRI. The I´ndice de Sustentabilidade Empresarial (Corporate Sustainability Index
ISE) at the Brazilian stock exchange BOVESPA is a pioneer in Latin America.5 Canada has its own Jantzi Index6 as well, linked to the Dow Jones Sustainability Index.7 The insistence on sustainability standards by stock exchanges is a strong argument for companies to measure and report on social and environmental indicators of CSR. It also indicates that non-financial risk reporting is gaining influence as a means of measuring financial success. Institutional investors have proposed to the World Federation of Exchanges (WFE)
a trade association of 62 publicly regulated stock, futures and options exchanges
an initiative that would require extra-financial disclosure among companies listed on members’ stock exchanges.8 Sectorial associations have joined the trend and offer additional legitimacy through voluntary sectorial reporting, with indicators specific to an industry, such as the ICMM Index.9 Strategic policies such as the UN Global Compact emerged in international forums to address the specific role of businesses, as drivers of globalization, in helping ensure that markets, commerce, technology, and finance develop in order to benefit economies and societies. Institutional changes might originate in discourse, but they only qualify as such if they reflect practices. After an initial consideration of the global context and the integration of CSR ideas and discourses as a part of business at a macro level, the discussion will link these to CSR policy programs and practices at the organizational (meso) level. Sustainability and

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communication managers from MNC headquarters revealed through interviews that international and sectorial CSR guidelines did in fact serve as checklists for new strategies and operations.10 At SteelCo, these specifically led to the development of a human rights policy, the disclosure of health and safety information, and the inclusion of diversity criteria in recruiting and training. Following Thornton, Ocasio, and Lounsbury, we suggest that institutional logics are embedded within these practices. The authors define institutional logics as the “socially constructed, historical patterns of cultural symbols and material practices, including assumptions, values and beliefs, by which individuals and organizations provide meaning to their daily activity, organize time and space, and reproduce their lives and experiences” (Thornton et al., 2012, p. 2). This analytical framework proved useful for understanding how “actors are influenced by their situation in multiple social locations in an interinstitutional system, for example the institutional orders of the family, community, religion, state, market, professions and corporation” (Thornton et al., 2012, p. 2).11 A series of critical events can create opportunities for change in practices and symbolic representations, which constitute institutional logics. Let us take workers’ health and safety in a mining MNC as our example. The corporation’s logic emphasizes expansion and diversification as its main strategy. Following SteelCo’s 2006 acquisition of the Canadian firm NickelCo and its subsidiaries, and its rapid expansion as a Brazilian MNC abroad, there was pressure on SteelCo to demonstrate capacity to participate in competitive markets. Market logic pushes for a strategy aiming at increasing efficiency and profit. The MNC’s status on the market and its share prices serve as the main sources of legitimacy. Through strong hierarchical management sustained by both the corporation’s logic and a hierarchical type of capitalism (Schneider, 2013) in its home country of Brazil,12 the MNC enforces its corporate identity across all operations. Another significant event is concomitant with the expansion period and the adoption of GRI guidelines and the UN Global Compact. According to SteelCo’s 2008 sustainability report, 14 fatal accidents occurred in 2007. During this critical juncture, tensions with workers’ unions were exacerbated at some of its operations. Professional logic calls for a strong relational network as its root metaphor (Thornton et al., 2012), which is particularly strong among miners in Canada. For unionized workers, the source of authority is the professional association and personal expertise a main source of legitimacy. Canadian local unions

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have a long history of safety training capacities and know-how in underground mining. In this area, they are different from their Brazilian counterparts, much weaker for various institutional factors. We will discuss this question further along, but for now, the main argument for illustration is the MNC’s strong top-down initiatives according to corporate logic, meeting resistance in the health and safety arena stemming from professional logic.

THE CHALLENGES OF A MULTIPLE-LOGICS INTERINSTITUTIONAL SYSTEM Adopting CSR guidelines is therefore only a first step in the process of incorporation of an integrated CSR strategy. Accepting and addressing different institutional orders at play is another key factor for success. Moves in this direction have led to an increased demand for specialized labor to manage NGOs and institutes, and as a result executives have been drawn into the third sector (Lindenberg, 2001). Conversely, qualified NGO staff are migrating to CSR/sustainability expert positions in the private sector. Since internal CSR discourse and practice assimilate elements of community and professional logics of action, the fact of having previous experience with the alternative logics of involved actors has improved understanding between the different parties. To our knowledge, no research has yet been conducted on whether this swap movement is meeting the “discourse versus practice” challenge. However, current research goes as far as affirming that some companies’ CSR efforts can be counterproductive. Barnett and Salomon (2006) demystify this logic with data that show that doing “more good” can actually result in harm for some companies. Carroll and Shabana (2010) also stress that the impact of CSR on a firm’s financial performance is not always favorable, depending on mediating variables and situational contingencies. Internally, employees and unions welcomed additional health and safety measures and disclosure requirements in CSR indexes and reports. They also applauded safety bonuses for days without losttime injuries or years without fatal accidents. However, concerns for safety were reported to have been reduced owing to peer pressure to keep safety checks at a minimum in order to maximize performance-pay bonuses. For the same reason, workers forced themselves to go to work even when ill or recovering. In order to avoid recording lost-time injury,

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small lesions are not always attended to in accordance with established procedures. Fatal accidents are inevitably disclosed together with assurances of prevention, compensation, and remedy measures. Minor injuries might thus appear differently in the statistics depending on the recording procedures followed. Numbers must therefore be understood within their context of practice. Health and safety in the mining industry is a major concern for management, operations, trade unions, and the community. Their different institutional logics co-exist as complementarities or enter in conflict depending on the sources of legitimacy, authority and identity and the main basis of strategy. This is why the transversality of CSR practice fuels debates: it exposes contradictions between the various institutional logics. CSR involvement corresponds to the source of authority of the market logic through shareholder activism requesting non-financial disclosure at stock markets, and to the source of authority of the corporation when officially endorsed by the CEO and board of directors. However, it doesn’t automatically reflect on the source of legitimacy of the market and the corporation: the share price and the market position of the firm. CSR-inspired practice brings legitimacy to the community and professional logics, but only if the MNC appeals to the personal expertise of the stakeholders and builds up a belief in trust and reciprocity (Fig. 1). Participative multi-level and multistakeholder processes also lend legitimacy within a state logic of democratic participation. To sum up, the input box and the output box are normally linked. If an MNC is responsive to stakeholders, negotiates and has mediation mechanisms such as a hotline, the trade-off is the validation of good performance results. What comes out of the process
legitimacy, accountability, transparency
will probably help with input and output, but is not necessarily connected (Barnett & Salomon, 2006; Schmidt, 2013). This is why when the basic process is flawed, the involved actors might be perceived as biased, oppressive, or corrupt.

Input

Throughput Responsiveness to stakeholders Hotline/ombudsman Negotiation

Fig. 1.

Legitimacy Accountability Transparency Trust

Output Performance Zero harm CSR certification and prize

Perception of CSR Legitimacy. Source: Modified from Schmidt (2013).

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HOME- AND HOST-COUNTRY INSTITUTIONAL CONTEXTS Taking up CSR as a field of study has afforded us a closer examination of the challenges, in addition to the paybacks, of the CSR strategies and practices of MNCs. Current institutional research scrutinizes the process of incorporation of CSR as an example of institutional change within corporations and other organizations. According to Brammer, Jackson, and Matten (2012), institutions linked to CSR do not constitute separate superpowerful elements. They strengthen one another and form constellations, which in turn promote certain types of corporate governance and CSR models. Jackson and Aguilera (2003) helped reconcile institutional analysis with the role of different stakeholders (capital, labor, management). We built on their actor-centered institutionalism, initially applied to corporate governance, and developed it from the perspective of CSR’s internal target group in MNCs operating in developed and developing or emergent countries. The initial model became more complex with the introduction of new variables, such as the state. Jackson and Aguilera (2003) do not include the state as a stakeholder. They acknowledge only a limited level of state influence when it comes to the definition of a public interest agenda and its corresponding institutional policies. In Southern countries, especially the ones which experienced dictatorial regimes, commodities exporters were often created or nationalized by the state. Even in subsequent democratic regimes, we argue that the state can maintain an important and decisive role. The shareholder structure at SteelCo illustrates the complexity of state influence on the second biggest mining MNC in the world. Despite being privatized by the Brazilian government in 1997, executive power retains significant influence over the company’s management and strategic direction. Following privatization, Valepar became SteelCo’s controlling shareholder, with the right to appoint nine of the board’s ten directors. Previ, Banco do Brasil’s pension fund, is the majority shareholder of Valepar with 49% of shares. Previ’s executives, many of them ex-union workers, have strong ties with the government, led by the Labor Party since 2003. Banco do Brasil is a publicly listed semistate organization that is 68% controlled by the Brazilian government. The Brazilian president appoints Banco do Brasil’s CEO and the bank actively implements government policies, like support for agribusiness, exports, and loans to small and medium enterprises. Valepar is also 11.51% owned by

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BNDES, which provided its record loan of R$7.3 billion for a single corporation to SteelCo in 2008, followed by an additional R$6.2 billion in 2014 for expansion projects. In addition to this indirect control through Valepar, the Brazilian government owns 12 golden shares, which entitle it to special veto power over fundamental changes in SteelCo’s business, including “change in corporate purpose.” The state thus appears as an influent actor in the institutional configuration of SteelCo. No¨lke (2013, state-permeated market capitalism) and Schneider (2013, hierarchical capitalism) both illustrate the intertwined relations between the state and business in Brazil
including its largest firms Petrobras and SteelCo
as characteristic of this variety of capitalism. Developments in the theory of varieties of capitalism sprang from a need to connect political activity back to region-specific firm strategies and institutional complementarities in Latin America. The influential presence of MNCs, the permanence of diversified business groups, and the predominance of low skills are associated with features of corporate governance and labor markets which contribute to the resiliency of hierarchical capitalism. The state is often pressed to support core economic institutions and corporations where it has fundamental interests. Canada is usually identified as a liberal market economy (LME), together with the United States, the United Kingdom, Ireland, Australia, and New Zealand, but this match with the ideal type has been questioned. State legislation explains many of Canada’s particularities, from universal healthcare to the high density of trade unions and distinct doctrines in labor laws that incline toward a pro-labor standpoint, such as anti-scab legislation (Duffy & Johnson, 2009; Godard, 2010; Sayce & Gold, 2011). These examples illustrate why the state remains an important actor, even while recognizing the preeminence of corporative economic and even political power in the last half-century. In relation to employees, national labor laws serve as a starting point for labor conditions. National institutions not only mediate capital/labor relations but also shape the way labor conflicts will be managed, whether during negotiations over collective agreements, in attributing unions autonomy in their right to strike, in employee representation within corporate governance, and last but not least, through the disciplinary role of Labor Justice. The degree of specialization within the mining industry means that the skills of employees are mostly non-portable. Combined with the relative low number of positions available in the mining regions, workers tend to prefer internal participation to solve workplace demands/conflicts over simply leaving the company to resolve their grievances. The institutions that

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incorporate and give a voice to workers in relations with CSR are active through representational rights within the corporate governance and trade organizations. Workers in both countries participate in health and safety committees to receive information, participate in consultations on possible hazards and safety improvements, and participate in quality control. The main difference between the two companies consists in the capacity and involvement of trade unions in these committees. Inspired by the classification described by Graser (2013) and subsequently applied to MNCs by Hassel and Wagner (2014), we can divide the range of policies and practices mentioned so far into four categories. The institutional configurations of internal CSR in our examples show the influence of the home and host countries in the regulatory and distributive spheres. Work standards and working conditions are set and monitored by national or provincial legislation. General safety and health provisions, social standards and basic education and training are also addressed by state institutions. However, the discretionary spending and soft policies spheres are largely influenced and shaped by the MNCs through selfregulation. The MNCs’ own health and safety guidelines (“Safe Production,” “Golden Rules”), specific education programs and career opportunities, as well as employee-matching funding, are initiatives of each corporation. A wide range of soft policies inspired by intergovernmental or NGOS are included in the CSR strategies of MNCs. MNCs recognize and integrate these soft policies in their reporting for the GRI, UN Global Compact, OHSAS 18001, ISO 26000, and CSR Indexes.

DISCUSSION AND CONCLUDING COMMENTS Inspired by Jackson and Aguilera’s model, we observed that the configuration of internal CSR at NickelCo, with a strong class-based workers’ union and an educational system mostly financed by the state, tends to give greater importance to external control of internal CSR through collective agreements, labor laws, and a labor union independent of the employer, with decision-making processes separate from the mixed-representation bodies within the firm. The USW Local 6500 union relies on a long tradition of collective agreements negotiations, seniority-driven values at work, and the maintenance of acquired benefits. They are also confident in their capacity to develop their own policies and act professionally in the field of health and safety at work. Union representatives participate as

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autonomous actors in meetings with SteelCo managers. Another example is from one of the unions representing SteelCo workers in Brazil, specifically Rio de Janeiro (SINDIMINA-RJ), where the headquarters of the MNC are established. A weakened union movement and the dependence of labor on the firm usually lead to the favoring of internal participation strategies through representation on internal committees (Jackson & Aguilera, 2003). The Extractives Industries Union, representing the workers of Canadian GoldCo subsidiary, operates within a similar institutional setting. It does not have the human and financial capacity to rise as an autonomous actor and develop its own initiatives and policies. It does offer legal and financial counseling for its members in the case of firing without due cause or losttime injuries. When demands from employees are channeled through the union, they tend to be more accepted than individual ones, but they are directed toward the firm’s internal hierarchy and procedures. These cases show the importance of the strategic role of the subsidiaries of MNCs and the influence of home and host countries with their specific institutional settings. It confirms what Galina and Moura (2013) reviewed with regards to two assumptions underlying MNC attitudes in relation to the roles and responsibilities to be assigned to subsidiaries in the area of CSR. These are related to (1) the level of local aptitudes and resources or the level of competence shown by the national subsidiary in technology, production, marketing, or any other area; and (2) the strategic reasons for the choice of location as an environment where the company will do business, such as costs, market, or access to knowledge. In mining, we would also add the necessary presence of metals. It follows that the power and interests of the MNC itself and in the host country’s institutional setting shape the transfer of internal CSR practices through processes that call upon institutional resources both at the macro level of the host labor market and the micro level of the MNC. The question of power has to be examined in its embeddedness. On the one hand, it is deployed by powerful MNC actors to shape, sustain and activate macroand micro-level institutions; on the other, institutional context provides actors with power capabilities with which to facilitate, block, or modify the transfer of practices (Ferner, Edwards, & Tempel, 2012). When SteelCo took over NickelCo, the latter had over 100 years of history. In one Ontario location especially, many workers were thirdgeneration miners, with a collective memory of practice, a tradition of collective bargaining, and the support of a proactive union. The 2009
2010 strike happened in a new globalized context in which the nickel mined by NickelCo (as it was then called) accounted for only 14% of the MNC’s

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global production and nickel prices were at a low. Previously, the local unions and NickelCo had a common interest in settling labor conflicts rapidly in order to resume production. USW Local 6500 had to learn new rules of bargaining with the world’s second biggest mining MNC operating in a globalized economy. Combining theories of variety of capitalism and human resources management (HRM) to explain the dynamics of the transfer of HR practices in MNCs from emerging economies with subsidiaries in advanced economies, Aguzzoli and Geary (2013) suggest that there is a trend in MNCs from hierarchical market economies (HMEs) to draw upon international HR “best practice,” and, in so doing, will come to act as vehicles for the diffusion of US hegemonic practices through hired consultancies, mainly from US firms. More indirectly, the authors highlight that these HME MNCs represent particularly strong firms within their sectors to have succeeded in internalization. They might therefore have the capacity to introduce new approaches to HRM and internal CSR, consequently initiating a dynamic wherein other existing firms within a given sector of a host economy come to match the practices of the dominant firm. We have seen that the institutional framework of the host country is a key factor in the regulatory and distributive spheres, while the spheres of discretionary spending and soft policies are largely influenced and shaped by the MNCs through self-regulation. Multinational institutions, such as the GRI and UN Global Compact, do influence all spheres with regards to internal CSR. They reaffirm human rights and labor standards already integrated into national laws and labor codes. Most decisively, they guide the process of institutionalization of CSR within MNCs and other organizations. There is also evidence in top-ranking countries for CSR reporting of some sort of government or stock exchange initiative encouraging disclosure (GRI, 2013). This demonstrates that institutional changes in the field of internal CSR do occur through a blending of different institutional logics. The balance of power in favor of the MNC gives primacy to the market and corporate logics. The nature of internal CSR allows nonetheless for the professional logic to bring its expertise to bear and rally its members through its relational network. While corporate logic stresses hierarchical relations and bureaucratic roles, it is tempered in CSR-related issues by a community logic aiming at building trust and reciprocity, therefore combining dimensions of diverse logics. The multiple-actor institutional configuration within each country and MNC must reconcile these different logics of action. Labor representation and unions retain a key role in counterbalancing market and corporate logics of action.

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We conclude that the institutionalization of CSR practices seek to strengthen a firm’s legitimacy and to recognize its value in its particular field. The specificity of MNCs consists in adopting global strategies in order to take advantage of the value-creating network over the country’s borders, and, at the same time, put in place strategies of embeddedness to avoid the “outsider” label and benefit from advantages connected to strategic participation in public policies, associations, networks, and institutions in the country or region of the subsidiary (Heidenreich, 2012). The results are the specific institutional configurations of internal CSR in different countries. The ability to switch from being an integrated actor to a global actor according to the corporation’s interests at stake differentiates the MNC from local businesses. Subsidiaries also acquire the ability to translate and adapt guidelines from headquarters
which convey the identity of the managers at headquarters and of institutions in the home country
for their internal and external audiences in the host country in such a way as to fit into the host country’s specific institutional environment.

NOTES 1. These include voluntary international norms such as the UN Global Compact, Global Reporting Initiative (GRI), OHSAS 18001, and ISO 26000, and international indexes associated with the stock exchange such as the Dow Jones Sustainability Index, Jantzi Index in Canada, I´ndice de Sustentabilidade Empresarial (ISE) in Brazil, and many others. 2. The “South” and the “North” are shorthand for the power structures and imbalances between the economic haves and have-nots of the world. It symbolizes economic axes and power relationships, not hemispheres. 3. SteelCo, its subsidiary NickelCo, and GoldCo are pseudonyms. The MNCs did not grant us permission to use their real names. 4. Available at https://www.globalreporting.org/information/news-andpress-center/Pages/GRI-stakeholder-NYSE-Euronext-strengthens-its-commitment-tocorporate-transparency.aspx (accessed June 20, 2014). 5. The ISE is a tool for the comparative analysis of the performance of BM&F BOVESPA-listed members based on corporate sustainability, with economic, environmental, social justice, and corporate governance indicators. Available at https:// www.isebvmf.com.br (accessed August 19, 2014). 6. Available at http://www.sustainalytics.com/indexes (accessed August 19, 2014). 7. In February 2013, the Dow Jones Sustainability Index presented a new index for emerging markets: http://www.sustainability-indices.com/dow-jones-sustainability-indices/index.jsp (accessed May 14, 2013).

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8. Available at http://www.unglobalcompact.org/news/1021-05-22-2014 (accessed May 27, 2014). 9. ICMM: International Council on Mines and Metals. Available at http://www. icmm.com/our-work/sustainable-development-framework/10-principles (accessed May 14, 2013). 10. Interviews carried out by the author on April 15, 2013 in Rio de Janeiro, Brazil. 11. Stakeholder theory is considered a “necessary process in the operationalization of CSR, as a complimentary rather than conflicting body of literature” (Matten, Crane, & Chappel, 2003, p. 111). Together with convention theory (Boltanski & The´venot, 1991), it bears conceptual similarities (e.g., enabling aspects of logics (or repertoires), legitimacy, identity) with the institutional logics perspective. These approaches all seek to analyze conflicting logics without focusing on isomorphism and to explain how the meaning of behavior changes with shifts in the referent to different institutional orders. 12. Schneider describes how the commodity boom of the 2000s strengthened business groups (and to a lesser extent MNCs) in Brazil. Internationalization came largely with the support of the National Development Bank (BNDES). The BNDES and government employees’ pension plans became major shareholders of many of the largest listed firms. Direct state intervention in corporate governance is one of the characteristics of hierarchical capitalism in Latin America, together with weak or absent institutions, which trigger different (informal) organizational responses, namely diversified business groups, MNCs, segmented labor markets, and low-skill regimes. Hierarchical relations also characterize more general employment relations, where employees lack formal grievance procedures and representation, and where there is a high rate of employee turnover.

ACKNOWLEDGMENTS I would like to thank the Centro de Pesquisa e Po´s-Graduac¸a˜o das Ame´ricas of the University of Brasilia (CEPPAC/UnB) and the Conselho Nacional de Desenvolvimento Cientı´fico e Tecnolo´gico (CNPq) for a four-year study grant that enabled me to carry out this work. I am also grateful to professors Danilo Nolasco, Moise´s Balestro, Roberta Aguzzoli and two anonymous reviewers for comments and to Mona-Lynn Courteau for copy-editing the chapter.

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42.

INCORPORATING VOLUNTARY STANDARDS INTO NATIONAL LAW: AN OVERVIEW OF THE SCANDINAVIAN EXPERIENCE John McNally ABSTRACT Purpose
This chapter outlines incorporation of voluntary environmental accounting standards into national law as evidenced by the Scandinavian experience. In illustrating such hardening of soft law approaches it highlights difficulties national authorities face when attempting to regulate globalised commercial entities with extraterritorial activities. Adoption at national level of these standards into legally binding obligations illustrates convergence of global governance standards even where there is no central authority or designed codification. Methodology/approach
Doctrinal legal research and literature review. To illustrate the incorporation of voluntary standards at a national level, Scandinavian examples (Denmark, Norway, Sweden and Finland) were chosen
frequently upheld as best practice in requiring the reporting of environmental information financial reports.

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 67
91 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017011

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Findings
The research shows that the most proactive national authorities in this regard are endorsing certain voluntary standards and rewarding their use with reduced regulatory burden. I first outline certain voluntary environmental standards and then illustrate adoption of these standards into legally binding frameworks. Research limitations
The main limitation was difficulty in finding English language versions of some national regulations. Practical implications
This chapter seeks to illustrate a normativisation of soft law frameworks into legally binding national obligations. Viewed through the phenomenon of Global Administrative Law it would seem evident that national authorities are willing to adopt various international voluntary standards to regulate the increasingly globalised actions of companies. Originality/value
Voluntary standards and the various reporting methods of non-financial information is an extremely broad regulatory sphere with decentralised regulation and parallel regulatory frameworks. This chapter, in illustrating the convergence of environmental governance standards through normativisation of previously voluntary standards, will assist the reader in attaining an overview of the extent of this regulatory convergence. Keywords: Climate change; regulation; legislation; voluntary standards; global administrative law

INTRODUCTION Global Administrative Law (GAL) while not a centrally planned governance structure can clearly be observed as a phenomenon. This is where, in the absence of an international authority, various voluntary standards have emerged to ensure good governance. In this chapter, focusing on financial markets’ regulatory framework concerning commercial environmental information (CEI), GAL provides a useful lens through which to examine any possible convergence or the lack of coherence, if any, in rules relating to environmental information. Individual countries, recognising the limitation of national legal measures when dealing with a globalised business model, frequently recommend, endorse or require the accepted

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international standards of transnational entities such as the UN or Organisation for Economic Co-operation and Development (OECD) and Private Entities or Non-Governmental Organisations.1 These standards are invariably based on the principles of good governance: transparency, accountability, reviewability and fairness that arguably form the basis of GAL. Thus, in reviewing examples from Scandinavia (Denmark, Norway, Sweden and Finland) and through these highlighting the instances where international standards are endorsed at a national level it illustrates the convergence of legal norms relating to environmental information management at a national level. The next question to be considered is the significance of the adoption of such voluntary standards at a national level which make such standards legally binding. The first issue is that of sovereignty and the argument that a country should not be delegating their role as lawmakers by merely adopting these voluntary standards overseen by private bodies (such voluntary standards are usually designed and operated by non-governmental organisations) rather than the more traditional supra-national entities such as the UN or a regional entity such as the European Union. However this stance can be countered by a country’s obligations under other international agreements for example the United Nations Framework Convention on Climate Change (UNFCCC) and the obligations contained in its Kyoto Protocol. It would also seem to be a prudent exercise of sovereignty to take a standard that is independent, has been shown to work and which is legitimised by various stakeholders already voluntarily submitting to it rather than trying to design one at a national level from scratch. Finally the international characteristic of such standards avoids the abovementioned problem of trying to govern the international actions of a commercial entity with a national measure which only has effect within national borders. Thus the realisation of regulatory goals can sometimes be more effectively achieved by voluntary agreements and cooperation with commercial entities rather than the traditional ‘command and control approach’ (McIntyre, 2007). As this is such a broad area to examine, it is useful to focus on a specific area of environmental reporting that not only can cause difficulties in how to measure and report the impacts of a commercial entity but also comes with the added complication that some quarters still deny the extent of anthropocentric influence on its adverse effects and even the existence of the phenomenon itself: climate change. However with national obligations to reduce emissions at a national level and increased consumer awareness, commercial entities are reporting on their impact on the climate. Between

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voluntary standards and legal requirements, it is an extremely decentralised regulatory space and can be hard to navigate for all stakeholders involved and specifically (i) the commercial entity; (ii) its investors; and (iii) consumers. It is precisely the broad and complicated nature of this regulatory space that makes it an ideal example to focus on with regard to regulatory convergence. Further the importance in private entities’ certification schemes in the climate change abatement regime makes it an excellent example (Dimitropoulos, 2011). To that end, the financial markets would appear, at the outset, to be a major consumer and producer of such information. This assumption is based on the increasing appetite for environmentally friendly consumer goods and investor products in order to alleviate the causes of climate change or reduce levels of pollution. Thus a company that wishes to benefit from market sentiment favouring ecological benefit may be tempted to distort the market by releasing misleading information or suppressing damaging CEI. This chapter aims to establish the regulatory frameworks that are in place to prevent this and to discover the extent individual countries are normativising voluntary soft law by adoption into legally binding regulatory frameworks. While emphasising CEI, many of the reporting requirements also place an emphasis on corporate social responsibility (CSR) of which environmental sustainability forms a part (see further GonzalezPerez, 2013).

WHAT IS MEANT BY ‘FINANCIAL MARKET’ AND WHAT ARE THE RELEVANT MARKETS? The necessary starting point is to outline what is meant by the term ‘financial market’ and to identify which of the financial markets climate related CEI is most relevant to. The most basic definition of a ‘financial market’ describes it as: An organisational framework within which financial instruments can be bought and sold. (Howells & Bain, 2000)

This basic definition clearly describes the financial market that most individuals will be familiar with
the stock market. However there are several forms of tradable financial instrument for example securities: stocks and shares, government bonds, insurance policies, banking bonds, etc. It is the capital markets in securities, instruments which can be bought and sold

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between third parties, within which CEI will be most pertinent. Capital markets provide funds from investors for long term use of commercial entities with the aim of a return on the initial sum. Within the capital markets, it is the financial instruments known as equities (company shares) which are mostly traded. Such trading gives rise to issues surrounding the disclosure of climate related CEI to the market as it is likely to affect the price of equities. Any misleading disclosure or non-disclosure of information will affect the integrity of a market as this may result in investors losing confidence in the information which is available to them. In the worst case scenario, this loss of faith can lead to a market crash. Each investor in a commercial entity, whether an individual or an institutional investor (e.g. a pension fund), will buy their shares at the market price in anticipation of: (a) a rise in the market price for future sale and/ or (b) a dividend2 return. The investor’s decision to buy company shares will depend on (i) the market price, which will vary depending on the future prospects of the company that is risks and opportunities, and (ii) the risk profile of the company that is the likelihood of a major impact on the profits of the company leading to a fall in the share price and/or reduction in the dividend. The risk profile and price relies on availability of the relevant information to the market at any given time. Such information which is relevant to an investor’s decision process is known as ‘material information’. To put it another way, information is considered material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision, or if the information would alter the total mix of available information. Therefore the control of such information goes to the heart of regulating markets, as the issue of information asymmetry, where a company will more readily have access to material information than market stakeholders, can lead to situations of market abuse or distortion by a company trying to protect its share price (e.g. Enron) or an individual attempting to make a quick profit. A third reason that an investor may include climate related CEI in their decision-making rationale would be to ascertain the environmental performance of a company. This could be due to the environmental reputation of the company, whether positive or negative, or the fact that an institutional investor is managing a ‘green fund’ to take advantage of consumer appetite for environmentally friendly products. Climate related CEI thus becomes highly relevant to capital markets as such information will have a direct impact on the performance of an equity through reputational damage,

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leading to a drop in sales or increased regulatory cost in certain industries, resulting in greater compliance costs through plant and process upgrades. It can be seen therefore that there may be a significant incentive for a company not to disclose certain environmental information to the market in order to maintain market value. Apart from capital markets, it is important to consider how the derivatives market regulates CEI. Derivatives contracts promise to deliver underlying products at some time in the future or give a right to buy or sell them in the future.3 For the purposes of this research it is useful to note that carbon credits are considered commodities derivatives however this chapter focuses on the capital markets in securities.

A SELECTION OF COMMONLY RECOGNISED VOLUNTARY REPORTING STANDARDS In order to understand the variety of voluntary standards it is necessary to briefly outline some of the more commonly cited standards. The examples below are designed and overseen by either supra-national organisations such as the United Nations (UN) or private non-governmental organisations such as the International Organisation for Standardisation (ISO). It is an important consideration when considering private standard operators to examine how rigorously their standard is monitored and enforced. Where sustainability standards are concerned there is an alliance of such standard setters, the International Social and Environmental Accreditation and Labelling Alliance (now simply referred to as the ISEAL Alliance),4 that ensures that members abide by the principles of good governance in order to ensure credibility.

The UN Global Compact The UN Global Compact is a voluntary governance code that in partnership with the UN5 helps global companies prevent corruption, human rights abuses, labour abuses and environmental damage. The benefits to commercial entities, in addition to reputational enhancement, include increased cooperation with stakeholders, access to management tools and new governance methods, etc. There are ten principles under each of the

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four headings. Specifically to this chapter, the three environmental principles are (i) to support a precautionary approach to environmental challenges;6 (ii) to undertake initiatives to promote greater environmental responsibility and; (iii) to encourage the development and diffusion of environmentally friendly technologies. Governance of the global compact was revised in 2005 following a review; however the emphasis is still on non-bureaucratic, network based governance where the performance of each participant being monitored by locally based stakeholders.7

The OECD Guidelines for Multinational Enterprises The OECD is a supra-national body whose member states have come together in order to improve economic development. The OECD Guidelines for Multinational Enterprises, while similar to the UN Global Compact in encouraging responsible business practices, provide voluntary standards for a broader range of issues that may affect a global commercial entity including: employment and industrial relations standards; human rights considerations; environmental impact; greater information disclosure; prevention of bribery; consumer interests; scientific and technological developments; competition and taxation. The guidelines grew out of the concern from the member countries that it was virtually impossible to regulate a commercial entity’s activities beyond national borders. Initially adopted in 1976, they are continually reviewed with the last revision being in 2011.8

The European Union Eco-Management and Audit Scheme The European Union Eco-Management and Audit Scheme (EMAS) is a management framework developed by the European Commission to aid commercial and other entities in measuring, auditing and improving their environmental performance. The European Union is a recognised regional supra-national entity which also implements legally binding instruments but participation in EMAS is voluntary. The scheme could be described as a tool rather than a standard framework, however it embodies certain practices in a business similar to those contained in other voluntary standards and also allows for the display of the EMAS logo by the participating commercial entity.9

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International Organisation for Standardisation The ISO is arguably the most recognised independent standard setter in the world. Its membership comprises standard setting bodies of its member countries. It has a wide stable of standards covering many topics. With regard to the reporting of non-financial information by a commercial entity, the two main standard suites concerning this chapter would be ISO 14000 on environmental performance and ISO 26000 on Social Responsibility with each of these having many subcategories for example with regard to climate change in order to help organisations to quantify their greenhouse gas emissions and communicate them
ISO 14064 and ISO 14065. Governance of these standards is rigorously monitored and enforced to ensure the credibility of the standards when a stakeholder sees them displayed.10

Carbon Disclosure Project The Carbon Disclosure Project (CDP) is an international nongovernmental not-for-profit organisation that provides a framework for companies to measure and report their environmental impact under the headings of greenhouse gas emissions, climate change strategies, water stewardship and deforestation risk management. Once these impacts are quantified, the resulting CEI is publicly reported through the CDP. In addition to commercial entities the CDP works with other stakeholders including governments, policy makers and even cities.11

Global Reporting Initiative The Global Reporting Initiative (GRI) is another international nongovernmental not-for-profit organisation that has developed and oversees a sustainability reporting framework for commercial entities and other organisations. The GRI’s goal is to enable greater transparency and accountability through a credible framework of reporting an entity’s impacts. Founded in 1997 it was formally accepted as a collaborating organisation by the UN Environmental Programme (UNEP) in 2002. The fourth revision of the guidelines is known as G4 and was implemented in May 2013. The G4 reporting standards have a specific category for environmental information regarding the inputs and outputs of the commercial entity and their impact

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on living and non-living natural systems including land, air, water and ecosystems. With regard to climate change this could include information on emissions but also energy usage, transport and regulatory compliance and expenditures.12

NATIONAL INCORPORATION OF VOLUNTARY STANDARDS INTO LEGALLY BINDING OBLIGATIONS: WHERE CAN WE FIND BEST PRACTICE
SCANDINAVIAN ENVIRONMENTAL DISCLOSURES The Scandinavian countries have long been considered to lead the way with regard to ecological considerations and the protection of the environment.13 This is constantly borne out in studies on environmental attitudes in various European countries. See for example the introduction to a 2004 study on environmental attitudes and behaviours14 (Kelly, Fiachra, Pauline, & Hilary, 2004) and also the Environmental Sustainability Index (ESI).15 For the purposes of this chapter I will be using the reporting requirements and frameworks of Denmark, Norway, Sweden and Finland as an example of best practice16 and an illustration, where applicable, of the adoption of private voluntary standards into legally binding national law.

Denmark Denmark is noted as being the first country to adopt a green reporting provision in its environmental protection legislation. In 1995 a provision was added to the Miljøbeskyttelseloven (Environmental Protection Act) which requires that certain listed intensive industries obtain a licence to operate and that they must prepare annual green accounts (Nyquist, 2003). This information is held publicly by the Danish Business Authority.17 The companies are free to decide on the presentation of the information but it must include energy use, emissions, water consumption and raw materials used. The data is usually presented in absolute terms but if the information is deemed too sensitive for the firm, then it may be displayed as indices. The green accounts must also contain a management statement detailing any changes from previous years and why the information presented is

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considered significant. Any company which is involved in EMAS may submit this report instead. There is no requirement for the companies to have the information provided audited nor that the information be presented in monetary terms. However, it was found that investors were beginning to include the green accounts in their evaluation of firms. In 1998 the Environmental Protection Act was amended to require certain companies in the construction sector or those emitting toxic waste into the environment to disclose the environmental consequences in their annual report.18 In 1999 the effectiveness of the law was reviewed and it was found not to have achieved the desired results (Jørgensen & Holgaard, 2004). Thus in 200119 legislation was introduced to amend the annual accounting requirements allowing companies to enter additional reports with an emphasis on CSR and to improve the communicative nature of the information.20 Furthermore it requires publicly listed, state-owned companies (Class D) and companies with over 250 full-time employees or a turnover of DKK 238 million (h31.9 million approx.) (Class C) to report on the impact of their activities on the environment and any measures which they have taken to prevent, reduce or compensate for such environmental damage.21 These increased reporting requirements and emphasis on intelligibility reflect the principles of international standards of good governance such as those contained in the GRI.22 The revisions to the act also allow for some information to be reported only every three years if the company is adhering to the standards set out in ISO 14001,23 a clear illustration of an international privately developed standard being incorporated into legally binding national regulatory provisions
in this case lessening the reporting burden where the standard is in use.24 Finally the revisions bring the reporting requirements more in line with European Union requirements relating to statistical data on waste and emissions, etc. In 2008 an amendment25 to the A˚rsregnskabsloven (Financial Statements Act) was passed which amended the reporting requirements of the Class C and D companies mentioned above. This had the effect of requiring about 1,10026 of the largest companies to include their CSR27 activities in their annual reports. The information required consists of three parts: (i) the company’s CSR policies; (ii) how these policies are translated in actions and (iii) the CSR results achieved and any expectations of future actions.28 If this information is not contained in the report, its absence has to be justified. Thus since 2009 the companies affected are Class D listed state-owned public limited companies and Class C companies fulfilling at least two conditions that is a balance sheet of over DKK 143 million (h19.2 million approx.), a net income of over DKK 286 million (h38.3 million approx.)

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and over 250 full-time employees. The same reporting requirement has been introduced by executive order of the Finanstilsynet (Danish Financial Supervisory Authority), for institutional investors, mutual funds and other public limited finance businesses. It is important to note that unlike the original Environmental Protection Act, Section 135(5) of the A˚rsregnskabsloven contains a requirement that the information contained in the report, including the CSR information, must be audited by a third party.29 There is an exception for companies that are adhering to the UN Global Compact or UN Principles for Responsible Investment. However, here the auditor must verify that the business in question fulfils the conditions laid down in the act in order to qualify for this exemption. The auditor ensures this by verifying that a Communication on Progress has been prepared and is publicly available.30 By way of assisting the companies in their duties, the Danish government has produced an implementation guide. Any company partaking in the UN Global Compact and UN Principles for Responsible Investment is encouraged to refer to this guide ‘Communication on Progress’ on how to disseminate their CSR information.31 An interesting point to note is that the Danish guide suggests three framework standards to which the companies may adhere to in addition to the UN guidelines which they endorse
they32 mention and encourage the use of the Global Reporting Initiative (GRI)33 and AccountAbility’s AA100034 standards as example frameworks.35 In addition, requirements adopted by the Danish Parliament36 which came into effect in 2013 require specific disclosure on whether or not the company has policies to ensure respect for human rights and information on its policies to reduce the climate impact37 of the company’s activities.38 Whether or not company chooses to have CSR policies remains a voluntary decision; however the lack of a CSR policy must be disclosed.39 The impact of these initiatives was investigated in a 2010 report prepared for the Danish government.40 For example, it is interesting to note some of the statistics highlighted. Ninety-seven percent of the businesses that are subject to the legal requirement comply with it. Eight percent of these are subsidiaries who comply with the legal requirement by default of their parent company providing information about CSR on behalf of the entire group. Thus, the reporting businesses consist of 89% of the businesses examined. Ninety-one percent of the reporting businesses state that they work with CSR, while 9% state that this is not the case. The majority of the 91% of businesses, which work with CSR, account for their policies and actions, while 37% account for achievements resulting from work with CSR.

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The report notes that 28% of the businesses use an international CSR principle, in particular the UN Global Compact, with 9% (of 38% using CSR indicators) using the Global Reporting Initiative (GRI).41 The level of interaction with CSR policies and their realisation is higher among listed companies than non-listed companies which would suggest such information’s importance to investors.42 Those businesses that do not use international CSR principles cited that their international nature made it impractical for national based businesses. The average recurring cost of preparing the report varied between h871 and h4,38343 with slightly less than one third of businesses unaware of the internal benefits and slightly less than half unaware of the external benefits of working with CSR.44 Thus with around 43% of businesses reporting on CSR for the first time as a result of the legal requirement, the majority viewed it as a positive development (e.g. individual departments viewed it as a catalyst to combat managerial inertia45) while not having been actually aware of the benefits of such engagement with CSR.46 The influence of GAL convergence is clear in the Danish case as the government specifically integrates generally accepted international frameworks as a guide to the form and content of the CSR report. Further to this the Danish government can also be seen to reduce the regulatory burden on companies that are utilising the ISO 14001 standard. Throughout the construction of the reporting framework the Danish government has taken account of the pre-existing voluntary standards and incorporated them into the legally binding reporting legislation
a normativisation of voluntary soft law. Could this be illustrative of an emerging global standard on reporting climate performance? In the 2012 amendment to Section 99a of the Financial Statements Act, the requirement was introduced for companies to explicitly state their policies in relation to reducing their negative impact on the climate. An explicit legally binding obligation to report CEI on climate mitigation policies framed through existing voluntary standards would appear to be a manifestation of GAL. Another interesting point to highlight was the assumption of the business community and their rationale for not having previously included CSR in the annual report, due to their view that this document was primarily of interest to individuals seeking financial figures. However, after fulfilling their reporting requirements using the voluntary frameworks they have come to accept that CSR affects the overall financial position of the company and consider the annual report as a key document that is of great importance for the business’ strategic communication.47 With regard to environmental considerations, the final interesting statistic to take from the

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report is that the theme of environment and climate was the highest reported among the Danish companies
a point explained by the fact that this is the area of CSR that Danish companies most work with.48 This can only increase given the explicit requirement to report on climate policy following the amendment of Section 99a. With a long history of regulation and a comprehensive impact assessment, Denmark is clearly a leader in the field of best practice of CSR regulatory frameworks. It is therefore important to note the Danish endorsement of the voluntary international standards as set by the various private bodies outlined above. The integration of these voluntary standards into national legally binding legislation cannot be overstated.

Norway In 1998 Norway adopted Regnskapsloven (a new Accounts Act) replacing the demands for environmental information contained in Asjeloven (the previous Stock Act) with more comprehensive requirements.49 Under Regnskapsloven all firms no matter what their size have to disclose how their business affects the natural environment where the impact is significant. This information is required to be contained in the administration report even where firms have a separate environmental report or sections.50 This information must deal with the entire life cycle of the product or service (e.g. amount of energy and raw material used, type and quantity of emission, waste, accidents, transportation emissions and effects of use and discarding).51 The act imposes a specific obligation on the mining, petroleum and energy production sectors to specify amounts set aside for future expenditure on remediation and clearance work.52 The aim of the act is to encourage the management to undertake their business in a more environmentally responsible manner where the environmental effects of the firms’ actions are easier to extract from the report. However, even though the administration report is an object for auditing, the environmental information contained therein is not and the act states that there is no need for external auditing.53 However companies may enhance the credibility of their reports through voluntary external auditing.54 In January 2009 the Norwegian Ministry of Foreign Affairs recommended a white paper on CSR to the Storting (Norwegian Parliament).55 The purpose of the paper was to set out Norwegian government policy on CSR for the future. The paper covered all aspects of CSR including the standards that the Norwegian government required of Norwegian

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companies when operating abroad. This is an interesting approach as it would have the effect of achieving extra-territorial application of Norwegian national law on any company registered in Norway which has operations abroad. Although this is a national application of standards, it could arguably be said to be GAL in operation as the Norwegian standards would apply if there were lower standards in the external host country. It also stated that any nationally owned businesses should be setting the example with high CSR standards.56 The importance of CSR was highlighted in relation to the investment dealings of the government pension fund.57 However, following on from the above obligations on Norwegian registered companies operating abroad and in recognising the limitations of national law when dealing with a company’s international operations, the Norwegian Government endorsed the UN Global Compact,58 the OECD Guidelines for Multinational Corporations,59 the Global Reporting Initiative (GRI)60 and the CDP.61 The Norwegian Accounting Amendment Act 2013 introduced provisions that require large companies62 to report on how they integrate various aspects of CSR, including environmental considerations, into their business strategies. The minimum requirement is that the report must contain information relating to policies, principles, procedures and standards that are followed in order to successfully integrate these CSR considerations.63 It is important to note that the Ministry of Finance has been granted the power to exempt companies that prepare a public report according to the UN Global Compact principles or the GRI framework. Once again the national authority has integrated these voluntary international standards into legally binding national regulations by easing the regulatory burden on those commercial entities which operate these internationally accepted standards. Similar to Denmark above, it is important to note that the Norwegian government is utilising the existing international voluntary standards and endorsing them as the standard to create legally binding obligations on companies to operate within both nationally and internationally. When Norwegian Foreign Minister Espen Barth Eide launched the proposal he specifically endorsed the GRI framework stating: GRI has established a comprehensive CSR reporting framework that is widely used around the world. The implementation of this framework is the main challenge
we don’t need to reinvent the wheel … it’s about getting it rolling.64

This is a clear endorsement of the approach of taking existing voluntary standards and implementing them as legally binding standards at a

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national level. The exemption for companies that operate within the GRI is an easing of the legally binding reporting obligations contained within the Norwegian legislation. It is clear to see this convergence of standards as further evidence of the operation of the GAL phenomenon.

Sweden Sweden legislated in relation to environmental information in 1999. In amending the A˚rsredovisningslagen (Annual Accounting Act)65 the administrative report must now contain information pertinent to the evaluation of a firm’s status, results and future development (i.e. information that an investor would consider material to their making an evaluation). Firms that require an IPPC licence under the Miljo¨balken (Swedish Environmental Code also of 1999)66 must report on their environmental impact. Notably, financial institutions are also included in this legislation.67 The Annual Accounting Act was updated in 2005 obliging certain companies to increase the categories on non-financial information that they must report on.68 The 2007 Guidelines for Reporting by State Owned Bodies make it mandatory for nationally owned companies to produce a sustainability report using the GRI’s G3 Guidelines69 which are based on a framework of ‘comply or explain’ (i.e. the company may deviate from the framework if necessary but must explain its rationale for doing so). The report must be externally audited.70 While Sweden is only making the voluntary standards binding on state-owned commercial entities, this provides a good example for other companies operating within Sweden. In other words this allows other companies to see the framework in operation and provides for a normativisation of the obligations set out therein. For example out of 55 eligible companies in 2011 there was a 96% compliance rate with 92% of these sustainability reports externally audited. From 31 December 2013 large companies as defined in the Annual Accounting Act must include certain categories of information in the Directors Report section of the Annual Report. In addition to these general guidelines as set down by the Bokfo¨ringsna¨mnden (Swedish Accounting Standards Board) there are specific guidelines concerning the disclosure of non-financial information regarding environmental and social issues.71

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Finland The Finnish Kirjanpitolaki (Accounting Act) of 1997 obliges certain companies to include material non-financial issues in the Directors Report Section of the Annual Report. In addition to ratios and other key information, Chapter 3 of the Act,72 dealing with the content of the annual accounts and annual report, requires that the companies must disclose information on personnel, the environment and other potentially significant matters which could impact on the operations of the commercial entity.73 The 2011 Resolution on State Ownership Policy74 requires non-listed state-owned and majority state-owned companies to report their sustainability performance in an accurate and comparable manner. The underlying objective as set out is to make Finish nationally owned enterprises as transparent and consistent in reporting CSR information as possible thus encouraging non-state-owned companies to follow suit. Specifically with regard to environmental performance, the resolution seeks to achieve a high standard of environmental protection and compliance without interfering with the aim of continuing competitiveness: Companies must strive for exemplary and responsible conduct in their environmental policies based on compliance with the legislation and international conventions. As an owner, the State is prepared to promote arrangements by which companies seek to reconcile financial and production-related goals with environmental considerations in a way that contributes to the companies’ competitiveness in the long term. In the assessment of the environmental impacts of corporate operations, due consideration will also be given to the State’s environmental policy objectives.75

It is a noteworthy point that while the resolution specifically mentions the legally binding instruments of legislation and international conventions it additionally notes that non-binding policy considerations must also be considered. Furthermore while there is no explicit mention of voluntary international standards, the resolution features a reporting model based on the GRI’s G3 and G3.1 Guidelines and ISO standard ISO 2600076 on Social Responsibility.77 With Finland constantly inhabiting the top tier of countries regarding sustainability and environmental performance, arguably Finnish policies can be put forward as an example of best practice. The fact that voluntary international standards such as G3, and ISO 26000 are incorporated into binding requirements, albeit restricted to semi-state commercial entities, it

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points to the operation of GAL normativisation of such voluntary standards. As Daniel C Esty noted in relation to the ESI: Comparative analysis allows us to understand where conditions may be improving and where they are deteriorating, which policies are working and which are not, and where ‘best practices’ may be found. (Esty, 2002)

Such normativisation of voluntary standards by those countries held up as exemplars of best practice, illustrates the validity of utilising widely accepted voluntary international standards when formulating national legally binding reporting requirements on companies. This can be seen to lead to a harmonisation of standards and arguably a resulting coherence of regulation across international, regional and national levels.

CONCLUSION The proliferation of independently designed and monitored voluntary schemes and standards is clear to see. It is such a broad field that it can be difficult to ensure the credibility of such standards and thus the actual realised improvement in sustainability. The soft law of these voluntary standards has been taken up by commercial entities on an ad hoc basis in order to improve their reputation or to appeal to the increased appetite of consumers for sustainable products. It is interesting to see the normativisation of these standards at a regional78 and national level into legally binding obligations or a reduced regulatory burden where such voluntary frameworks are being utilised. This evidence of GAL convergence in action ensures rigorous application of good governance and thus the credibility of such standards and an actual increase in sustainability at a national level with regard to domestically registered companies and at a global level with regard to their extra-territorial operations. It is true that these independent voluntary standards are in themselves hard to govern as they operate on the same international basis as the globalised companies that they seek to police; however it can be seen that they are governed by the principles of good governance contained in the phenomenon that is GAL (Kingsbury, Krisch, & Stewart, 2005). The hardening of these international good governance principles which originated in voluntary regulatory frameworks designed to increase transparency and accountability can only be seen as a good thing. It means a greater availability of CEI

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based on credible, verifiable measurement and reporting methodologies thus enabling the various stakeholders to accurately gauge the sustainability of a commercial entity. The more transparent and credible reporting of CEI is, companies will improve their performance leading to increased sustainability. However, independent standard organisations are not perfect as illustrated by the disagreement between the two accounting standard bodies the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) on how to properly treat carbon assets and liabilities in the required accounts.79 Therefore while this initial normativisation of voluntary standards is a positive step, there is still more scope for improvement.

NOTES 1. Such as the International Standards Organisation (ISO), the Fairtrade label, the Carbon Disclosure Project (CDP) or the Global Reporting Initiative (GRI). 2. A ‘dividend’ is a variable stream of future income paid out of the company profits (Howells & Bain, 2000, p. 175). 3. Howells and Bain (2000, p. 289). 4. See further http://www.isealalliance.org/. Last accessed on 31 July 2014. 5. The UN is an example of a supra-national entity whose authority is based in legally binding international conventions and agreements. 6. The precautionary approach basically means that if there is even the slightest risk of harm occurring, the method should be changed or replaced in order to ensure the harm is prevented from occurring. 7. Further information on the UN Global Impact is available at http://www. unglobalcompact.org/index.html. Last accessed on 31 July 2014. 8. Further information on the OECD Guidelines for Multinational Enterprises can be found at http://mneguidelines.oecd.org/about/. Last accessed on 31 July 2014. 9. Further information on EMAS is available at http://ec.europa.eu/environ ment/index_en.htm. Last accessed on 31 July 2014. 10. Further information on the International Organisation for Standardisation is available at http://www.iso.org/iso/home.htm. Last accessed on 31 July 2014. 11. Further information on the Carbon Disclosure Project can be found at https://www.cdp.net/en-US/Pages/HomePage.aspx. Last accessed on 31 July 2014. 12. Further information on the Global Reporting Initiative is available at https:// www.globalreporting.org/Pages/default.aspx. Last accessed on 31 July 2014. 13. ‘Finland Leads World on Environment’, Redorbit/AFP, 28 January 2005. Available at http://www.redorbit.com/news/science/122787/finland_leads_world_ on_environment/. Last accessed on 31 July 2014. 14. It was found that the populations that tended to show most commitment to pro-environmental attitudes and behaviour were those in the Scandinavian countries, including, Norway, Sweden, Finland and Denmark, along with the

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Netherlands, as well as the populations of a ‘Germanic’ group of counties, which included Germany, Austria and Switzerland. See ‘Finland Leads World on Environment’, Redorbit/AFP, 28 January 2005. Available at http://www.redorbit. com/news/science/122787/finland_leads_world_on_environment/. Last accessed on 31 July 2014. 15. Environmental Sustainability Index available at http://sedac.ciesin.columbia. edu/data/collection/epi. Last accessed on 31 July, 2014. In 2002 the top three countries were (1) Finland, (2) Norway and (3) Sweden (Seelye, 2002). The Nordic Countries remain in the top segment relating to environmental sustainability as of 2010. The study takes into account 68 variables
including how a country responds to water and air pollution, how it protects land, whether its government is corrupt and how seriously it takes global climate change
to measure environmental ‘sustainability’, or likely environmental quality of life over the next generation. The 2014 Environmental Performance Index (E.P.I.) places the Nordic countries in the top 20 rankings available at http://epi.yale.edu/epi/country-rankings. Last accessed on 31 July 2014. 16. ‘Sweden and Denmark Lead the Way in Sustainability Reporting’, 6 October 2010. Available on https://www.globalreporting.org/information/news-and-presscenter/Pages/Sweden-and-Denmark-lead-the-way-in-Sustainability-Reporting.aspx. Last accessed on 31 July 2014. 17. Formerly the Danish Commerce and Company Agency (D.C.C.A.). 18. See http://www.reportingcsr.org/_denmark-p-46.html. Last accessed on 31 July 2014. 19. Act No. 258/2001 and S.O. no 594/2002. 20. Thy (2003). 21. See http://www.reportingcsr.org/_denmark-p-46.html. Last accessed on 31 July 2014. 22. Jørgensen and Holgaard (2004, p. 13). 23. The ISO is an independent non-governmental organisation and is the largest developer of voluntary international standards. ISO 14001 is the standard relating to environmental management systems. See further http://www.iso.org/iso/catalogue_ detail?csnumber=31807. Last accessed on 31 July 2014. 24. See https://www.globalreporting.org/information/policy/initiatives-worldwide/ Pages/Denmark.aspx. Last accessed on 31 July 2014. 25. Act No. 1403/2008. 26. See ‘Corporate Social Responsibility and Reporting in Denmark; Impact of the Legal Requirement for Reporting on CSR in the Danish Financial Statements Act’ Danish Companies and Commerce Agency, August 2010, p. 1. Available at http://www.reportingcsr.org/force_document.php?fichier=document_379.pdf&fichier_ old=CSR_and_Reporting_in_Denmark[1].pdf. Last accessed on 31 July 2014. 27. Defined in Section 1 of the 2008 Act as meaning ‘that businesses voluntarily include considerations for human rights, societal, environmental and climate conditions as well as combating corruption in their business strategy and corporate activities. Businesses without policies on social responsibility shall disclose this information in their management’s review’. 28. See ‘Corporate Social Responsibility and Reporting in Denmark; Impact of the Legal Requirement for Reporting on CSR in the Danish Financial Statements

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Act’ Danish Companies and Commerce Agency, August 2010, p. 1. Available at http://www.reportingcsr.org/force_document.php?fichier=document_379.pdf&fichier_ old=CSR_and_Reporting_in_Denmark[1].pdf, p. 2. Last accessed on 31 July 2014. 29. In the first year of operation it was noted that there were some failures on behalf of auditors to highlight omissions in the report due to confusion resulting from changes in the reporting system. Therefore the assessment recommends clarification of the auditors’ responsibilities. 30. See http://www.reportingcsr.org/force_document.php?fichier=document_35. pdf&fichier_old=ReportingCSR_IntroductionSupervisory.pdf, p. 11. Last accessed on 31 July 2014. 31. See http://unglobalcompact.org/docs/communication_on_progress/Tools_and_ Publications/COP_Basic_Guide.pdf. Last accessed on 31 July 2014. 32. See ‘Corporate Social Responsibility and Reporting in Denmark; Impact of the Legal Requirement for Reporting on CSR in the Danish Financial Statements Act’ Danish Companies and Commerce Agency, August 2010, p. 1. Available at http://www.reportingcsr.org/force_document.php?fichier=document_379.pdf& fichier_old=CSR_and_Reporting_in_Denmark[1].pdf, p. 12. Last accessed on 31 July 2014. 33. The GRI is an organisation specialising in the sustainability field and is based in the Netherlands. The GRI has developed a comprehensive sustainability reporting framework that is widely used internationally. It is a prime example of an independent standard setting body whose international standards have been incorporated into legally binding national laws. See further www.globalreporting.org. Last accessed on 31 July 2014. 34. AccountAbility is a global organisation that consults on improving the integration of corporate responsibility, sustainable development and good governance into commercial entities, non-governmental organisations and governments. They have achieved this by developing a suite of internationally recognised standards. AA1000 is the stakeholder engagement standard and again is a good example of an international privately constructed standard being incorporated into legally binding national law. See further www.accountability.org and in particular the Guidelines regarding AA1000 available on http://www. accountability.org/about-us/publications/aa1000-1.html. Last accessed on 31 July 2014. 35. See http://www.reportingcsr.org/force_document.php?fichier=document_35. pdf&fichier_old=ReportingCSR_IntroductionSupervisory.pdf, p. 11. Last accessed on 31 July 2014. http://unglobalcompact.org/docs/communication_on_progress/Tools_ and_Publications/COP_Basic_Guide.pdf, p. 13. Last accessed on 31 July 2014. 36. In June 2012, the Danish Parliament Amended Section 99a of the A˚rsregnskabsloven Financial Statements Act to include these further disclosure requirements. 37. ‘Corporate Social Responsibility and Reporting in Denmark: Impact of the Third Year Subject to the Legal Requirements for Reporting on CSR in the Danish Financial Statements Act’. The Danish Business Authority, March 2013, p. 3. Available at http://csrgov.dk/file/358879/csr_rapport_2013_eng.pdf. Last accessed on 31 July 2014.

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38. See ‘CSR Reporting as a Driver for Responsible Growth; Eight Case Stories from Danish Companies’. Danish Business Authority, 2013. Available at http://csrgov. dk/file/407519/csr_reporting_responsible_growth.pdf. Last accessed on 31 July 2014. 39. See ‘CSR Reporting as a Driver for Responsible Growth; Eight Case Stories from Danish Companies’. Danish Business Authority, 2013. Available at http:// csrgov.dk/file/407519/csr_reporting_responsible_growth.pdf. Last accessed on 31 July 2014. For an up to date summary of the respective legislation see https://www. globalreporting.org/information/policy/initiatives-worldwide/Pages/Denmark.aspx. Last accessed on 31 July 2014. 40. Corporate Social Responsibility and Reporting in Denmark; Impact of the Legal Requirement for Reporting on CSR in the Danish Financial Statements Act. Danish Business Authority (2010). Available at http://csrgov.dk/file/358879/csr_ rapport_2010_eng.pdf and subsequently followed by annual reports the most recent available at http://csrgov.dk/file/358879/csr_rapport_2013_eng.pdf. Last accessed on 31 July 2014. 41. This is unsurprising given that these two international standards were endorsed in the compliance guide but nevertheless provides further proof of the incorporation of the standards into the national legal system. 42. Nyquist (2003, p. 4). 43. Nyquist (2003, p. 4). However, it was noted that the amount of time estimated to compile the reports was exceeded by seven or eight times. 44. Nyquist (2003, p. 8). 45. Nyquist (2003, p. 14). They also refer to the great extent that businesses are free to decide what form the report should take as long as it contains the three dimensions of required information. 46. The 2013 report can be found here ‘Corporate Social Responsibility and Reporting in Denmark; Impact of the Third Year Subject to the Legal Requirements for Reporting on CSR in the Danish Financial Statements Act’. Danish Business Authority, March 2013. Available at http://samfundsansvar.dk/ file/358879/csr_rapport_2013_eng.pdf. Last accessed on 31 July 2014. 47. Nyquist (2003, p. 9). 48. Nyquist (2003, p. 11). 49. Nyquist (2003, p. 19). 50. Nyquist (2003, p. 19). 51. Nyquist (2003, p. 19). 52. Nyquist (2003, p. 19). 53. Government bill Ot.prp. nr. 75 (1997/98). There also does not seem to be a requirement to state the absence of an audit of such information. 54. ‘Carrots and Sticks; Sustainability Reporting Policies Worldwide
Today’s Best Practice. Tomorrow’s Trends’, UN Environment Programme, Global Reporting Initiative, KPMG and The Centre for Corporate Governance in Africa (2013). Available at https://www.globalreporting.org/resourcelibrary/Carrots-andSticks.pdf, p. 34. Last accessed on 31 July 2014. 55. ‘Corporate Social Responsibility in a Global Economy’, Report No. 10 (2008
2009) to the Storting Ministry of Foreign Affairs, Oslo, 23 January 2009. Available at http://www.reportingcsr.org/force_document.php?fichier=document_

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145.pdf&fichier_old=WhitePaperCSR_Norway_2009.pdf. Last accessed on 31 July 2014. 56. ‘Corporate Social Responsibility in a Global Economy’, Report No. 10 (2008
2009) to the Storting Ministry of Foreign Affairs, Oslo, 23 January 2009. Available at http://www.reportingcsr.org/force_document.php?fichier=document_ 145.pdf&fichier_old=WhitePaperCSR_Norway_2009.pdf, p. 17. Last accessed on 31 July 2014. Especially influential now that all registers of tenders have been publically available under the Public Information Act 2009. 57. ‘Corporate Social Responsibility in a Global Economy’, Report No. 10 (2008
2009) to the Storting Ministry of Foreign Affairs, Oslo, 23 January 2009. Available at http://www.reportingcsr.org/force_document.php?fichier=document_ 145.pdf&fichier_old=WhitePaperCSR_Norway_2009.pdf, p. 19. Last accessed on 31 July 2014. 58. ‘Corporate Social Responsibility in a Global Economy’, Report No. 10 (2008
2009) to the Storting Ministry of Foreign Affairs, Oslo, 23 January 2009. Available at http://www.reportingcsr.org/force_document.php?fichier=document_ 145.pdf&fichier_old=WhitePaperCSR_Norway_2009.pdf, p. 69. Last accessed on 31 July 2014. See further http://www.unglobalcompact.org/. Last accessed on 31 July 2014. 59. ‘Corporate Social Responsibility in a Global Economy’, Report No. 10 (2008
2009) to the Storting Ministry of Foreign Affairs, Oslo, 23 January 2009. Available at http://www.reportingcsr.org/force_document.php?fichier=document_ 145.pdf&fichier_old=WhitePaperCSR_Norway_2009.pdf, p. 64. Last accessed on 31 July 2014. See further http://mneguidelines.oecd.org/. Last accessed on 31 July 2014. 60. ‘Corporate Social Responsibility in a Global Economy’, Report No. 10 (2008
2009) to the Storting Ministry of Foreign Affairs, Oslo, 23 January 2009. Available at http://www.reportingcsr.org/force_document.php?fichier=document_ 145.pdf&fichier_old=WhitePaperCSR_Norway_2009.pdf, p. 71. Last accessed on 31 July 2014. See further http://www.globalreporting.org/. Last accessed on 31 July 2014. 61. ‘Corporate Social Responsibility in a Global Economy’, Report No. 10 (2008
2009) to the Storting Ministry of Foreign Affairs, Oslo, 23 January 2009. Available at http://www.reportingcsr.org/force_document.php?fichier=document_ 145.pdf&fichier_old=WhitePaperCSR_Norway_2009.pdf, p. 34. Last accessed on 31 July 2014. See further https://www.cdp.net/en-US/Pages/HomePage.aspx. Last accessed on 31 July 2014. 62. § 3.3 c regarding Statement of responsibility does not affect the original definition of a large company which was contained in the 1998 act and included companies with assets greater than KR 20 million or a number of employees that exceeded an average of 20 years work. 63. Subsidiaries do not have to report if the parent company is reporting for the whole group. 64. ‘Regulating for a More Sustainable Future: New Norwegian CSR Regulation Entered into Force’, Global Reporting Initiative, 12 June 2013. Available at https:// www.globalreporting.org/information/news-and-press-center/Pages/Regulating-fora-more-sustainable-future-New-Norwegian-CSR-regulation-entered-into-force.aspx. Last accessed on 31 July 2014.

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65. The 1999 Annual Accounting Act was still in force as of 25 March 2014. See http://www.bfn.se/english.aspx. Last accessed on 31 July 2014. 66. Available in English at http://www.regeringen.se/content/1/c4/13/48/385 ef12a.pdf. Last accessed on 31 July 2014. 67. Available in English at http://www.regeringen.se/content/1/c4/13/48/385ef 12a.pdf, p. 20. Last accessed on 31 July 2014. 68. This implemented the requirements of Directive 2003/51/EC the Accounting Modernisation Directive. 69. See further https://www.globalreporting.org/reporting/G3andG3-1/g3-guide lines/Pages/default.aspx. Last accessed on 31 July 2014. 70. Global Reporting Initiative, Government Initiatives, Sweden. Available at https://www.globalreporting.org/information/policy/initiatives-worldwide/Pages/ Sweden.aspx. Last accessed on 31 July 2014. 71. Global Reporting Initiative, Government Initiatives, Sweden. Available at https://www.globalreporting.org/information/policy/initiatives-worldwide/Pages/ Sweden.aspx. Last accessed on 31 July 2014. 72. As amended by Resolution No. 30.12.2004/1304. Available at http://www. finlex.fi/fi/laki/ajantasa/1997/19971336#a30.12.2004-1304. Last accessed on 31 July 2014. 73. Global Reporting Initiative, Government Initiatives, Finland. Available at https://www.globalreporting.org/information/policy/initiatives-worldwide/Pages/ Finland.aspx. Last accessed on 31 July 2014. 74. Available at http://valtionomistus.fi/english/files/2012/01/Periaatepaeaetoes 03112011_eng.pdf. Last accessed on 31 July 2014. 75. Available at http://valtionomistus.fi/english/files/2012/01/Periaatepaeaetoes 03112011_eng.pdf, p. 9. Last accessed on 31 July 2014. 76. See further http://www.iso.org/iso/home/standards/iso26000.htm. Last accessed on 31 July 2014. 77. See further http://www.iso.org/iso/home/standards/iso26000.htm, p. 22. Last accessed on 31 July 2014. Specifically Section 4 of the Guidelines deal with the reporting of CEI while Section 8 deals with supply chain management. 78. At the time of writing, the EU was awaiting Council Approval of a new Directive on the Reporting of Non-Financial Information by Commercial Entities of a certain size. The Directive similar to the national examples used above refers to a suite of voluntary standards such as EMAS, GRI, etc. This Directive will eventually be binding on all 28 Member States thus leading to increased reporting of such CEI on a Europe wide basis. 79. As of the time of writing the process to implement the standard IFRIC 3 was paused and has possibly been abandoned.

ACKNOWLEDGEMENTS The author would like to thank Dr. Owen McIntyre for his guidance and also to acknowledge the support of the Faculty of Law and Environmental Research Institute, University College Cork (National University of

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Ireland) and also to the Higher Education Authority for their Support under PRTLI IV.

REFERENCES Danish Business Authority. (2010). Corporate social responsibility and reporting in Denmark: Impact of the legal requirement for reporting on CSR in the Danish financial statements act. Retrieved from http://csrgov.dk/file/358879/csr_rapport_2010_eng.pdf and subsequently followed by annual reports the most recent. Retrieved from http://csrgov.dk/ file/358879/csr_rapport_2013_eng.pdf. Accessed on July 31, 2014. Dimitropoulos, G. (2011). Private implementation of global and EU administrative law: The case of certification in the climate change regime. In E. Chiti & B. Mattarella (Eds.), Global administrative law and EU administrative law: Relationships, legal issues and comparison (pp. 383
409). Viterbo: Springer. Retrieved from http://books.google.com/ books?id=DTixTnZOeHwC&pgis=1 Esty, D. C. (2002). Finland ranks highest in environmental index: U.S. lags new environmental performance study compliments annual sustainability ranking. Retrieved from http://news.yale.edu/2002/02/01/finland-ranks-highest-environmental-index-us-lagsnew-environmental-performance-study-com. Accessed on July 31, 2014. Gonzalez-Perez, M.-A. (2013). Corporate social responsibility and international business: A conceptual overview. In M.-A. Gonzalez-Perez & L. Leonard (Eds.), International business, sustainability and corporate social responsibility (Vol. 11, pp. 1
35). Advances in Sustainability and Environmental Justice. Bingley, UK: Emerald Group Publishing Limited. Howells, P., & Bain, K. (2000). Financial markets and institutions (3rd ed., p. 16). Harlow: Financial Times Prentice Hall. Jørgensen, T. H., & Holgaard, J. E. (2004). Environmental reporting: Experiences from Denmark. Technology, Working Paper 6. Development and Society, Department of Development and Planning, Aalborg University, November 2004, p. 9. Retrieved from http://www.plan.aau.dk/digitalAssets/5/5479_workingpaper62004.pdf. Accessed on July 31, 2014. Kelly, M., Fiachra, K., Pauline, F. & Hilary, T. (2004). Environmental attitudes and behaviours: Ireland in comparative European perspective. Research programme on environmental attitudes, values and behaviour in Ireland. Environmental Protection Agency. Dublin, p. 10. Retrieved from http://www.ucd.ie/environ/reports/envirattitudesthirdrept.pdf. Accessed on July 31, 2014. Kingsbury, B., Krisch, N., & Stewart, R. (2005). The emergence of global administrative law. Law and contemporary problems. New York, NY: NELLCO Legal Scholarship Repository. Retrieved from http://heinonlinebackup.com/hol-cgi-bin/get_pdf.cgi? handle=hein.journals/lcp68§ion=35. Accessed on July 31, 2014. McIntyre, O. (2007). The potential role in Irish law of voluntary environmental agreements for the transposition and implementation of E.C. environmental directives. Irish Planning and Environmental Law Journal, 14(4), 147
156. Norwegian Ministry of Foreign Affairs. (2009). Corporate Social Responsibility in a Global Economy. Report No. 10 to the Storting. Oslo. Retrieved from http://www.reportingcsr.

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org/force_document.php?fichier=document_145.pdf&fichier_old=WhitePaperCSR_ Norway_2009.pdf. Accessed on July 31, 2014. Nyquist, S. (2003). The legislation of environmental disclosures in three Nordic countries
A comparison. Business Strategy and the Environment, 12, 12
25. Seelye, K. Q. (2002). Study puts Finland first and U.S. 51st in environmental health. The New York Times (International Edition). Retrieved from http://www.nytimes.com/2002/02/ 02/science/02ENVI.html. Accessed on July 31, 2014. Thy, C. (2003). The Danish green accounts: Experiences and internal effects. Danish EPA. Retrieved from http://www.byelverton.net/sustainable_business/GreenAccounts.pdf. Accessed on July 31, 2014. UN Environment Programme, Global Reporting Initiative, KPMG and The Centre for Corporate Governance in Africa. (2013). Carrots and sticks: Sustainability reporting policies worldwide
Today’s best practice. Tomorrow’s trends, p. 34. Retrieved from https://www.globalreporting.org/resourcelibrary/Carrots-and-Sticks.pdf. Accessed on July 31, 2014.

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CORPORATE IMPACT ON THE ENVIRONMENT AND THE JUDICIAL DEVELOPMENT OF THE NORM OF CORPORATE SUSTAINABILITY: IMPLICATIONS FOR THE IMPLEMENTATION OF THE UN GLOBAL COMPACT Olawale Ajai ABSTRACT Purpose
This chapter examines and illustrates the judicial treatment of relevant concepts and norms of corporate sustainability and relevant implications for the implementation of the UN Global Compact. Methodology/approach
This is a conceptual examination of relevant legislation, cases and concepts used by judges in giving practical content to the concepts of ‘sustainable development’, ‘sustainability’ and ‘corporate sustainability’.

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 93
116 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017013

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Findings
The judiciary has been fashioning applicable policy, resolving and balancing the clash of interests, setting guidelines and parameters for statutory interpretation in elucidating the concept of corporate sustainability. To that extent ‘corporate sustainability law’ is developing, not only in municipal public law where legislation is the key driver, but as ‘soft’ international law. Research limitations/implications
This is a general survey of trends in judicial reasoning from different countries and legal traditions and is not applicable exclusively to any jurisdiction. The implication is that there is room for detailed study of applicable rules in each jurisdiction. Practical implications
The chapter offers guidance for strategic implementation of the Global Compact, compliance to emergent obligatory principles, for shaping policy and corporate political management. Originality/value
This chapter contributes to an understanding of the role and impact of the judiciary in developing corporate sustainability law and congruent principles of the Global Compact. Keywords: Corporate sustainability/CSR; Sustainable development; Human rights; Judicial interpretation/development of law; International law; UN Global Compact

INTRODUCTION The UN Global Compact seeks to promote ‘corporate citizenship’, generally regarded as synonymous with ‘CSR’ or ‘corporate sustainability’ (Backer, 2006; Morgera, 2009, p. 90; Nanda & Pring, 2013). It encourages a voluntary implementation and promotion of congruent principles by the private sector on the basis of an international public-private sector partnership (Deva, 2006). From that perspective of moving away from a statecentric focus of international law, other players, including corporations, civil society, governments and the UN (Kell, 2003), become important stakeholders. Their role in the development of this partnership is, therefore, equally essential (Sands, 2006; Witte, 2005). What about the judicial branch of government? In Kasky v. Nike1 the California Supreme Court allowed an action challenging the veracity of Nike’s claims about providing safe working

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conditions, although the case was eventually settled out of court. In Vellore Citizens Welfare Forum v. Union of India,2 the Court held that the principles of sustainable development, polluter pays and precautionary approach were part of customary international law. That may be open to debate; however, corporations should be aware that ‘green/blue washing’ and environmental delinquency may well have some legal implications and that the evolution of the law of corporate sustainability will sooner or later raise actionable legal duties involving current or earlier legal risks. Article 38 (1) (d) of the Statutes of the ICJ refer to judicial decisions as a subsidiary source of international law (Kennedy, 1987; Roberts, 2011). The role of the judiciary in the elucidation, interpretation and creation of international law and as a tool for encouraging conformity to rules of international law is important in the evolution and implementation of global norms such as that of ‘sustainable development’ (Bratspies, 2014; Jennings & Watts, 1992; Swart, 2010). The judiciary has been characteristically deliberate, but quite influential and sometimes dramatic (cf. Rosencranz, 2003; Shelton, 2005), in the evolution of the law of sustainable development and by implication, law of corporate sustainability
the emergent legal duty of companies in regard to the environment and development. Sustainable development involves difficult policy questions of balancing development with environmental protection and social equity and judges have wrestled with this problem, sometimes without sufficient legislative or political guidance (Shelton, 2005, at pp. XVIII & XXI). It is useful in this chapter to reflect on what the judges have been doing to help identify lines of convergence or divergence with and opportunities for their partnership3 in promoting the UN Global Compact. The rest of the chapter examines the elucidation of the relevant concepts and norms and discusses some of the main principles of law that appear derivable as suggestive of convergent approaches or lines of departure in terms of judicial policy in various jurisdictions and traditions of law. This is legitimate, as judicial opinions from different countries could form a subsidiary source of international law, or serve as evidence of state practice or help to establish a principle of international law. The first section explores the meaning of ecological and legal sustainability, followed by a discussion on environmental justice. The next part examines aspects of ideological/ doctrinal tension and solutions espoused by the judiciary. Next is an overview of some implications for the UN Global Compact and then conclusions.

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The Ecological Concept of Sustainability and the Legal Principle of Sustainability In the Case concerning Gabcikovo-Nagymaros Project (Hungary v Slovakia)4 the International Court of Justice (ICJ) famously expressed the principle that States parties were bound to consider the concept of sustainable development in their actions in relation to other states. Vice-President Weeramantry, in a minority opinion, expressed it as a norm rather than a concept and suggested that the excessive formalism in the law needed to be brought to an end so that law could reconnect to essential values that are core to human existence, impulses and dictates of historical experience. The majority emphasized the need to reconcile development with environmental protection, defining this as the substantive content of the concept of ‘sustainable development’. This was a procedural or process issue, really a requirement of due process (such as, by merely considering the environmental impacts of development activity), without necessarily dictating an outcome in favour of the environment (Howley, 2009; Trevisan, 2009). For Weeramantry, however, it was a substantive, outcome dictating norm, in fact a norm of customary international law (Howley, 2009). In other words, a value based norm that trumped other considerations, or at least contained a legal standard to be adhered to.

THE TENSION BETWEEN ‘DEVELOPMENT’ AND ‘ENVIRONMENT’ The approach of the majority appears to have been the general basis for judicial reasoning in international and domestic law (Bosselmann, 2008; Sands, 2003). For example, there is a tendency to allow economic and short term considerations to prevail, when a cost-benefit calculus suggests that short term economic survival or prosperity is at stake,5 or to prefer trade over the environment6 (Bosselmann, 2008, p. 71), except if that would amount to a patent threat to life as a result of widespread or grave impact and environmental degradation.7 Also, the availability or lack of scientific knowledge or documented data is usually a material factor8 (Connor & Dovers, 2004). In other contexts, particularly in the ICJ, the approach of the majority has been preferred.9 In Arbitration Regarding the Iron Rhine (‘Ijzeren Rijn’) Railway (Belgium v. Netherlands),10 the Tribunal ruled that:

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[e]nvironmental law and the law on development stand not as alternatives but as mutually reinforcing, integral concepts, which require that where development may cause significant harm to the environment, there is a duty to prevent, or at least mitigate such harm. ... This duty, in the opinion of the Tribunal, has now become a principle of general international law. This principle applies not only in autonomous activities but also in activities undertaken in implementation of specific treaties between the Parties.

It appears that Weeramantry’s approach is preferred in countries like India (Senger, 2007), Sri Lanka11 and South Africa.12 Howley argued that: A review of the literature and judicial decisions which make use of Gabcikovo indicates that, in respect of sustainable development, the manner in which the opinion of the majority and that of Weeramantry have subsequently been utilised do not differ significantly. Both have been endorsed as recognising the aim of sustainable development to integrate economic considerations with environmental protection. Further, whether considered custom or not, sustainable development is used procedurally as an ‘interstitial norm’ to guide decision-makers in reaching an ‘integrated outcome’. The impact of sustainable development does not therefore depend on it being a part of custom. Rather, explicit endorsement by either the majority or Weeramantry would have been sufficient.

With respect, the effect of adopting sustainable development as a rule of custom would be far more decisive, as it would require that environmental and human rights considerations should trump competing interests. Theoretically, that should lead to a better environmental quality and a more equitable, even if eco-centric sustainable development. In the hierarchy of norms of international law ‘custom’ ranks higher than general principles of law recognized by civilized nations. It appears that in Gabcikovo, Vice-President Weeramantry actually regarded sustainable development as a general principle of law rather than as customary international law. The deciding factor is that Howley recognizes that even when framed as a mere ‘concept’, sustainable development is a norm, even if an interstitial one. International law norms must be regarded by states as obligatory to be recognized as Custom. However, the concept of sustainable development is relatively new, evolving and States still widely differ in the primacy they accord to it. The approach of the majority in Gabcikovo better reflected the international law at that time. More important, however, is that a principle that requires that development be balanced against environment was enunciated. That balance may result from an anthropocentric approach some times and at other times may require an eco-centrist approach. Bosselmann (2008) and Senger (2007) both argue that ethical pluralism is possible

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except when there are irreconcilable conflicts. Therefore, the gist of the norm is the requirement that a balance be struck, rather than an undue ideological emphasis on either ‘development’ or ‘environment’. For example, in the Shriram Chemicals case,13 the Indian Supreme Court permitted the conditional continuation of operations at a plant from which Oleum gas had leaked after weighing the likely negative effect on employment and the possibility that viable safeguards that could be instituted, whilst making arrangements for the settlement of the claims of victims. In Hatton & Others v. The United Kingdom,14 on the other hand, a Chamber of the European Court found that the noise from increased flights at Heathrow airport between 4 a.m. and 6 a.m. when they had the right to be in the sanctuary of their homes enjoying their sleep violated their rights. ‘According to the Court, in balancing individual rights and the general welfare, the State cannot simply refer to the economic well-being of the country in the particularly sensitive field of environmental protection. Instead, it is required to minimize the interference by trying to find alternative solutions and by generally seeking to achieve their aims in the way least burdensome to human rights’.15 Greening the Concept of ‘Justice’
Process and Substantive Rights The concept of justice is rooted in distributive ethics of equality, equity and just deserts. It is an apt basis for conceptualizing sustainable development and the notion of intra and inter-generational equity in the exploitation of natural resources (Beyerlin, 2006, p. 276). Bosselmann (2008) rightly argues that the concept of ‘environmental justice’ is an ancient one. The common law creation of environmental torts in English law is good justification for that argument. However, it is anthropocentric in nature as it speaks to rational management of resources exploited by human beings and the reconciliation of their competing interests. In other words, it concerns relationships between persons, not relationship of persons to the environment, as it is human beings that have rights, not nature. He, therefore, proposes a concept of ecological justice that places primacy on the integrity of ‘ecosystems’ devoid of considerations of human needs in cases where they are under threat of extinction. He goes as far as to reflect environmental considerations in the conception of ethical justice and seeks to create a province of rights for non-humans or nature (Bosselmann, 2008, p. 81; Shiva, 2010).16 Global warming, floods, species extinctions could, in his opinion, be regarded, in a sense, as nature

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speaking
a sufficient justification, he argues, for involving non-humans too in the justice discourse (Bosselmann, 2008, p. 90). It is obvious that environmental justice evolved from iteration of early notions of property protection or protection of the safety of persons, both in municipal and international law (Howard, 2001
2002; Latham, 2011; Weintraub & Schromm, 2012; Wilde, 2002). The duty to avoid causing damage to the territory of neighbouring states17 takes its roots in an environmental harm of pollution but was primarily conceived as protective of safety of life or stock of natural resources, or other assets. The tort of nuisance was also basically an attempt to protect amenity rights (Steele, 2010, pp. 674
675). Judicial or legal focus on the environment itself as an inherent subject of protection is, therefore, a later development aided by the evolution of the concept of conservation and environmental protection, particularly by relevant international treaties. The concept of sustainable development has, therefore, introduced a further shift in the conceptual crease of legal and judicial discourse. Granted that the frame of reference is the interest of human beings to a holistic development that adequately balances economic activity and environmental conservation; yet originally, human beings are a part of the ecosystem and in many cases integral to its sustainability (Kaplan, 1992; Lang, 2002; Vining, 2008). Without becoming a partisan in the debate between eco-centric and anthropocentric loyalists, it may be sufficient to posit the protection of the biosphere and ecosystems on an enlightened and wise management of intergenerational resources balancing development and environment conservation. Environmental treaties (Freestone, 2011) and municipal legislation have been important sources for judicial development of the concept of sustainability (Rose, 2011; Ulfstein, 2007, p. 400; Warioba, 2001). Two approaches are common. The first is process based. It requires a trusteeship with regards to natural resources and the environment (cf. Balakrishnan, 2010). Therefore, it imposes on government a duty of rational management and consideration of environmental protection as a process issue in public decision making. This is typified by constitutions that create a Fundamental Duty and Directive Principle of State Policy18 (KameriMbote & Odote, 2009). The courts are, therefore, largely confined to an interpretative role of ensuring that the usually non-justiciable principles are observed. In Goa Foundation v. Diksha Holdings Pvt. Ltd,19 the Indian Court emphasized that it was not sufficient for government to pass environmental laws as passive tools but it was also essential to properly implement them to prevent pollution and harm to the people (Srivastava, n.d.).

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In some cases, activist judges have transmogrified the non-justiciable principles into norms of negative or positive content binding on organs of government. A logical method is to declare environmental damage or unsustainable practices as an assault on fundamental human rights (e.g. to life), as was done in Costa Rica,20 India,21 Bangladesh,22 Kenya23 and Nigeria.24 The other approach is to include a right to environmental protection in the bill of fundamental freedoms.25 Argentina,26 Columbia27 and Chile28 provide good illustration. Obviously, the role of the courts is much surer as they are accepted as the authoritative interpreters of such provisions. They would, therefore, function in their more traditional role of allocating legal responsibility and liability to parties in conflict.

Ideological Considerations and Practical Solutions The debate between eco-centrism and anthropocentrism is one frontier of ideological tension. The divide between conservative and liberal tendencies is another area and that between activist and strict-constructionist judicial attitudes is yet another area of potent tension. The concern here is that doctrinaire considerations should be minimized in the elucidation and development of the principle of sustainability by judges in order not to unduly constrain but rather to optimize sustainable development.

ECO-CENTRISM AND ANTHROPOCENTRISM Courts would appear to be generally quite pragmatic in their approach to the differing partisan views of advocates of ecological sustainability, activists and communities usually; and those of economic development, notably industry and business. In the Indian case of Intellectuals Forum, Tirupathi versus State of A.P. and Ors.,29 the Court remarked that the concept of sustainable development does not create a prima facie notion of guilt by companies and industries undertaking economic activity, and that evidence of unsustainable practices has to be adduced (Srivastava, n.d.). Also, in Tehri Bandh Virodhi Sangarsh Samiti v. State of U.P.,30 the Indian Supreme Court observed that although hydroelectricity projects are known to have negative effects on the environment that was insufficient of itself alone to proscribe their prosecution, as it was common knowledge that

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adequate mitigation measures may be available. It would not be sensible, therefore, to presume that they would necessarily lead to an ecological disaster and their importance from a development point of view meant that they could not be presumptively prohibited. It must be appreciated, therefore, that the courts will not whimsically and idealistically direct in any conflict that development activity must not be undertaken. This is underscored by the dictum of the African Commission on Human and People’s Rights in The Social and Economic Rights Action Centre and the Centre for Economic and Social Rights v Nigeria31 that: ‘… the government of Nigeria … has the right to produce oil, the income from which will be used to fulfill the economic and social rights of Nigerians. But the care should have been taken … and which would have protected the rights of the victims of the violations complained of was not taken’. Indeed economic development is a fundamental duty of the State and in some cases an explicit fundamental right for the current generation.32 Sustainable development requires an effective harnessing and stewardship of natural resources in order to assure their availability for future generations (Cordonia-Segger, 2005, p. 8). In The Director, Mineral Development Gauteng Region and Sasol Mining (pty.) Ltd v Save the Vaal Environment and others,33 the South African Supreme Court of Appeal held that: ‘Government must make sure that development which meets present needs must not compromise the needs of future generations’ (Razzaque, 2002). Implicit is the principle that the current generation must have their needs for development met by government.

HUMAN RIGHTS AND SUSTAINABLE DEVELOPMENT (BANERJEE, 2007; LUKAS, 2005) There have been attempts to utilize the American Aliens Tort Claims Statute (ATS) to hale American companies into American courts for environmental torts committed overseas. The jurisprudence has been mixed (Altschuler, 2010), with dicta in some Federal Appeal Courts upholding that principle,34 whilst others ruled conversely.35 The celebrated case of Bowoto v Texaco36 (originating from the Niger Delta) ended in favour of the company, whilst a similar case Shell v Wiwa37 was settled out of court. In Sosa v. Alvarez-Machain38 the United States Supreme Court held that the ATS narrowly applied to ‘a handful of international law cum common law claims understood in 1789’39 and was not a general basis for

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manufacturing tort claims or increasing jurisdiction to hold private actors casually liable for international wrongs, a province normally reserved for States. The court observed that no development in the law had occurred to rule out the possibility of new causes of action but emphasized that it must be a ‘restrained conception of the discretion [that] a federal court should exercise in considering such a new cause of action’.40 In general, at the municipal level, breach of fundamental rights is vindicated against wrongs committed by the State. Equivalent violations by wholly private parties, including companies, are vindicated under tort or criminal law generally. States owe a duty at international law to protect human rights within their jurisdiction by regulating private parties.41 Therefore, companies are fully liable for wrongs committed by them or by their officers under any relevant situation of vicarious liability. Where these involve environmental crimes some courts appeared initially lenient (cf. Cohen, 1991
1992; The Environmental Audit Committee, House of Commons, 2003
2004, p. 3), but increasingly tend to award huge claims for serious environmental violations, apparently because of more careful computation of the severity of the harm caused (Shelton, 2005, p. 58). Perhaps also there is an underlining consciousness of the need to deter an attitude by companies of adding damages for environmental harm to the expense column for business development by companies. Of course, there is growing demand to hold companies liable for human rights violations, although many cases cited as precedent really primarily fix liability on associated State defendants,42 or are in respect of primary State responsibility for violations committed within their territory by individuals or companies resident therein.43 Kiobel v Royal Dutch Petroleum, another Niger Delta case, contained dicta by the majority criticizing the argument to project companies as subjects of and therefore, liable in customary international human rights law. Of course, the aim of claimants is to forum shop into the home courts of multinationals where they perceive that the demands of justice may be better served. Another aspect relates to the evolution of social, economic and cultural rights and a right to development (Singh, 1988; UN Non Governmental Liaison Service, 2002). Our concern is not to debate the intricacies of this subject but to explore how the courts have developed the law as regards the activities of companies. It has been well said that the importance of a human rights conception is that: ‘Today we understand that without the full realization of all human rights, which necessarily means the eradication of poverty and the improvement of basic human dignity indicators, we are not moving towards sustainable development’ (Taillant, 2003). Courts, notably,

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in India, South Africa and The African Commission on Human and People’s Rights have developed jurisprudence in this area to gradually make these second and third generation rights justiciable (Oloka-Onyango, 2000). That has primarily meant imposing constraints on government to provide services, or to holistically consider social and economic impacts of development plans and activities.44 There has yet been no general imposition of direct legal responsibilities for human rights on companies by the courts or by international and domestic legal instruments (Aldson, 2010). In Registered Trustees of the Social and Economic Rights Action Centre and the Centre for Economic and Social Rights v. Nigeria & Chevron Oil Nig. Plc & others45 the African Commission on Human and People’s Rights declined jurisdiction over six oil companies on the grounds that companies were not parties to international treaty obligations and that ‘… international law has not arrived at a point that allows claims against corporation to be brought before international courts’.46 However, in Tas¸kin and others v. Turkey,47 following an inability to get the Turkish State to prosecute a company that had caused damage from the use of high levels of cyanide to extract gold the matter was brought before the European Court of Human Rights by the aggrieved parties. It was held liable for breach of their right to health and private life. Similarly, in the case of Societe´ Nikon France SA v. M. Frede´ric,48 the French court invoked the European Convention on Human Rights to hold a company liable after the plaintiff was dismissed by the company which read his emails from the company provided computer. The doctrine known as Drittwirkung (third party effect theory) is ‘also applied in Germany to some degree, where rights that are defined in the German Constitution are considered to be enforceable against individuals and private companies as well’ (Haibach, 2010). It appears also that civil claims can be brought under the European Council’s Regulation 44/2001 against multinational corporations registered or domiciled within the European Union, for violations of human rights under European Union law.49 The provision was invoked in Andrew Owusu v. N.B. Jackson,50 but the parties settled out of court. In the United Kingdom case of Lubbe and Others v. Cape Industries Plc,51 the House of Lords allowed a tort case instituted by South African asbestos victims to proceed. This was against the protestations of forum non conveniens by the parent company of the South African subsidiary on the basis that it would be difficult to mount the proceedings in South Africa. The implication is that negligence principles plus a more liberal attitude to the forum non conveniens doctrine by the courts may be another route for haling transnational’s into metropolitan courts, at least in the

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common law countries (contra, Bantekas, 2004; Kerr & Cordonier Segger, 2004). These cases demonstrate that some law is beginning to evolve to hold businesses responsible for human rights violations in the municipal and probably in a very limited manner, in the international sphere. This could be an ideologically more potent cause of action than the traditional claim in tort or even in environmental law. Of course, as Sosa underlines, companies may already be directly liable for a limited number of wrongs any way, for example, for serious international crimes. There are also calls for the establishment of a World Human Rights Court to try transnational corporations, private individuals and states for human rights abuses.52

SUSTAINABLE DEVELOPMENT AS ‘WESTERN IDEOLOGY OF NATURE’ Geisinger (1999) argues that the conception of man and nature being separate, with the latter subject to domination by the former is a western ideology. Nature is then viewed as a resource to be exploited in the satisfaction of the wants of man. Linked up with the free market ethic of unlimited creation of wealth or value, sustainable development is nothing but a human-centred ideology that grudgingly borrows scientific concepts in an attempt to ensure the long-term availability of natural resources, they maintain. They argue that there are other conceptions of nature that believe in limited or frugal use of natural resources or innately conceive of man as an integral part of a balanced and interdependent nature. Therefore, sustainable development need not mean an inexorable attempt to optimize use value for the long run in the quest for unlimited consumption. It could equally be framed as an attempt to redefine life styles to limit use of natural resources.53 Beyerlin (2006) argues that contrary to Geisinger’s thesis the concept of sustainable development is an integrative one that pragmatically aims to resolve the tension between development and environment. He says that the concept: … can very well be construed as a concept that directs States to preserve and protect the earth’s ecosystem without compromising the interests and needs of the developing world’s poor peoples. It provides for a very close interdependence between the competing policy goals of development and environmental protection.54

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This appears to be a sound answer, as the concept will remain relevant even with an alternative lifestyle that prefers less-intensive use of nature, to the extent that it does not totally eschew development or some measure of economic activity as an essential part of daily living. In Gabcikovo, Vice-President Weeramantry did allude to the excessive formalism of legal rules and separation of law from essential ecological values and examined anthropological chronology of man’s relationship with nature. He did not concern himself with ideological issues, as such. His was a pragmatic reconstruction of the role of law in attaining balance between development and environment. Courts have generally followed that approach, as the duty at hand is one of resolving practical problems of conflicting interests in resource use in the narrow compass of a real life case, not in essaying political postulations or deciding ‘academic questions’ of the relative benefits of hypothetical alternative life styles.

CONSERVATIVE AND LIBERAL TENDENCIES/ ACTIVISTS AND STRICT CONSTRUCTIONISTS This tension is most apparent in the American judicial system where judges are more openly perceived as ideological champions, or at least soul mates, of the party they belong to, or that appointed them to office (Neubauer & Meinhold, 2010). It is a perennial subject of discourse, particularly among civil society and social activists, whether a particular bench or panel of the Supreme Court would be friendly to environmental protection, say, because the balance of power tilts towards liberalism (Democratic ideals), or to protection of business interests, because the balance is in the other direction (Republican ideals) (Koons, 2009). It is also usual to refer to judges who are liberal as ‘activist’ and those who are strict constructionists as ‘conservatives’, although probably not even correctly (Barnett, 2008; Kafaltiya, 2010; Leemos, 2014). Dooley and de Valk criticized activist judges, calling them ‘robed politicians’ (1990). With due respect, it is better to focus on how the outcome of cases impact on the quality of the environment rather than on the ideology of the judges, except it leads to unreasonable results, not merely undesirable ones from an ideological perspective. Indeed in one particular year, the American Supreme Court was labelled anti-environment and conservative in one case and the opposite in another case (O’Keefe, 2007).

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Although the Indian Supreme Court could probably be regarded as activist (Rajagopal, 2008), it is not so clear that its judgments can justifiably be described as parochial or ideologically doctrinaire in the popular sense. It may have had to be inventive in devising procedural innovations to hale environmental causes into the courts where such would have been stymied by outdated judicial procedure, or even to extend principles of law to cover novel causes (cf. Balakrishnan, 2010). However, that has been the common law tradition of interstitial and sometimes radical development of the law to meet changing social needs. In other words, the outcomes appear to have enabled a judicially aided policy of better balance in the public management of the tensions between development and environment in India. After all, the court itself warned in Intellectuals Forum, Tirupathi versus State of A.P. and Ors.,55 that business must not be presumed to be inherently guilty in environmental litigation, nor economic activity to be prima facie unsustainable. The basic criticism that judicial activism is unrepresentative governance by the judiciary is a recurring one. Rajagopal labels the Court’s attitude and jurisprudence, in a politically non-dogmatic sense, as ideological and amounting to ‘judicial governance’. His major argument is that the Indian Supreme Court’s environmental and human rights jurisprudence favours the status quo, essentially from a political point of view. As the judiciary traditionally tends to seek to enthrone stability, predictability and to facilitate non-violent and incremental change where the pressure valve of social tension is primed to explode, he may be correct. His second argument that the courts engage in judicial grandstanding may be an unjustified blanket characterization of judicial activism in general. What this discussion demonstrates is that whether activists or strict constructionists, judges reflect an adherence to, or identification with currents of social ideologies or paradigms in their environment. That is not fatal to the cause of distributive justice as they must display patent neutrality by observing the rules of judicial reasoning, (in common law systems this includes precedent or the narrower concept of stare decisis) and a robust sensitivity to the concept of ‘reasonableness’, in particular, in categorizing case facts and linking them to legal concepts.

Some Implications from the Point of View of the Global Compact Since the concept of sustainable development, related policy and legislation is still evolving, applicable legal standards tend to be based on norms or

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principles rather than strict and definitive rules. Therefore, there is still scope for experimentation, creative judicial reasoning and activism. However, the concept is fairly well recognized and is hardening increasingly into rules of obligatory conduct and standards by means of judicial interpretation and analogical extension of legislative standards and commonly accepted principles of law. Diligent company directors must take note of the direction of events and the law; govern the company proactively to avoid future liability and to position it competitively into the future. The UN Global Compact promotes the principle of voluntarism but the judicial landscape is still open to influence by initiatives such as the Global Compact. The direction of evolving principles discussed in this chapter do not pose a threat to strategy, operations and profit for companies that wholeheartedly seek to implement the principles of the Compact. There is a noticeable pragmatic approach by judges; responsible corporate activity is to be encouraged as part of the duty of the current generation to the promotion of sustainable development. There is also a clear tendency of seeking overall balance between environment, human rights and economic activity that corporate leaders should find comforting. Opportunities for partnership between companies, the Global Compact and courts clearly exist. This is one dimension of the strategy to mainstream the Ten Principles of the Global Compact. Judges should, therefore, be included in the list of ‘Non-Business Participants’ to the Global Compact. As mentioned earlier, judges tend to take note of prevailing social norms, institutions and ideologies. Therefore, there is scope for the Global Compact to become the benchmark norm of corporate citizenship that judges refer to. Bantekas (2004) observes that the frequency of the use, stature of the sponsors and credibility of voluntary guidelines and reporting standards, such as the Global Compact, are bound to confer greater influence on them and may even possibly crystallize into customary international law. Judicial decisions may also serve as opinions of state practice, apart from being a subsidiary source of international law. The greater the extent that corporations of note worldwide adopt the Compact and effectively implement its principles; to that extent will they be able to facilitate its emergence as the benchmark norm of corporate citizenship and to shape judicial attitudes to accept it as declarative or constitutive practice of the ‘average’ or ‘reasonable’ corporate citizen. There appears to be a growing realization that companies, particularly multinational businesses, have an implied contract with society (Williams, 2004). Although the exact nature and distinct responsibilities are not settled, yet they must observe human rights (Williams, 2004). These sentiments are not lost on judges and policy

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makers in general and it is incumbent on businesses to seek to shape policy in beneficial directions. The Global Compact is a feasible platform for doing so (Deva, 2006). It is necessary to clarify that some of what the Global Compact encapsulates already amounts to legal duty, at least at the municipal level, in many jurisdictions. In other words, there are existing public laws that govern the behaviour of companies in their interactions with society and the environment. The duty to respect the rights of workers, their safety at work, implement basic decent work practices, maintain basic legislated environmental and anti-corruption standards are contained in municipal legislation in virtually every country. Signing up to the Global Compact ought to be a vote for good citizenship practices and some sort of ‘certification badge’ of responsible self regulation, if effective monitoring infrastructure accountability and compliance systems (such as, by collaboration with the Global Reporting Initiative (GRI)) can be institutionalized. Since self regulation of the activities of companies must form part of regulatory strategy, the Global Compact may become that ‘certification’ of compliance to minimum public law standards by its members and be recruited by regulatory authorities. The danger of adverse selection by ‘bad companies’ signing up to the Compact must be avoided; again, by ensuring effective accountability systems (Williams, 2004). Global business is only possible where basic ethical principles are practiced by business. There is a growing awareness of this point by multinational companies (Williams, 2004). It is in the enlightened self interest of global businesses to ensure a level playing field of assumed basic ethical principles in order to assure their own sustainability. However, the problem of externalities and the global commons (Harris, 2013; Stavins, 2011; Zilberman, 2011) make it a difficult enterprise to realize. There will have to be a sphere of minimum mandatory legal duties of corporate citizenship, apart from the voluntarism sphere that the Compact promotes. There is room for shaping the direction of public advocacy by offering the Global Compact as ‘the message’. Another dimension of strategy to mainstream the Ten Principles must be to have them transformed into enabling policies, legislation, standards, regulations and codes of practice, in spite of an ideological preference for the principle of voluntarism. Moreover, trends in the evolution of public attitudes, politics and policy to sustainable development globally suggest that the world will not be constrained by the preferences of global businesses. This is one reason why US companies who are lukewarm about joining the Compact (Williams, 2004) should change strategy, as it is better

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to shape policy than to react to legislation that has not adequately reflected business interests. The forum of the Compact is a place where that role can be effectively played. There is no guarantee that the trend towards promoting social consciousness by companies will ineluctably lead to ‘good’ or effective CSR (Devinney, 2009). Therefore, encouraging accountability, by the widespread and effective diffusion of the Ten Principles and other measures that are complementary, including evolving norms, standards and policies legislative, juridical and regulatory is necessary. Some basic substratum of legal duties and enforcement is useful. Judges have given pragmatic support to responsible business practices and an engagement with them appears needful.

CONCLUSION This chapter reviewed trends in the judicial attitudes to and treatment of the sustainable development paradigm around the world. It demonstrated that judges have been quite influential in the development of the relevant concepts, norms, principles and rules, often without sufficient political and legislative guidance. An emergent law and principles of corporate sustainability is being fashioned, in part, with the aid of judicial interpretation and activism. There is need to evolve effective strategy for partnership with the judiciary, as part of the mainstreaming of the Ten Principles. Basic legal duties of companies and their directors exist at public law any way and astute directors will recognize that their fiduciary duties require them to pay careful attention to the concept of corporate sustainability. Competent directors will also realize that the Ten Principles contain or may evolve into basic practice of responsible companies to be enforced legally as ‘trade practice’. The Compact appears to be a promising platform for global businesses to shape policy, for corporate political management strategy and promotion of the principle of voluntarism in the advancement of corporate responsibility.

NOTES 1. 27 Cal. 4th 939, 45 P. 3d 243 (decided 26 June 2003). 2. [1996] AIR SC 2715.

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3. UN Secretary General, ‘Enhanced cooperation between the United Nations and all relevant partners, in particular the private sector’, p. 8, delivered to the General Assembly, U.N. Doc. A/60/214 (10 August 2005). Available at http:// daccessdd.un.org/doc/U.N.DOC/GEN/N05/457/06/PDF/N0545706.pdf? 4. (1997) ICJ Rep.7; ILM 162 (1998). 5. In M.C. Mehta v. Union Of India (cited by S. S. Ghosh, ‘Sustainable Development and Indian Judiciary’, Legal Service. India.com: http://www.legalser viceindia.com/articles/jud.htm), the Indian Supreme Court initially directed cessation of stone crushing operations in and around New Delhi but on realizing the importance of the trade allowed it for a new ‘crushing zone’. 6. Turtle-Shrimps India et al v. US (1998); Tuna-Dolphin I Mexico v. US, Tuna-Dolphin II EU Comm. and Netherlands v. US. 7. For example, in T.N. Godavaraman Thirumulpad v. Union of India (2008) 2 SCC 222, the Indian Supreme Court held that felling of trees in the forests of Arunachal Pradesh State should be prohibited because of their importance for maintaining ecological balance necessary to protect biodiversity. 8. Cf. Tehri Bandh Virodhi Sangarsh Samiti v. State of U.P., 1992 (supp) 1 SCC 44, where the Supreme Court ruled that its duty was to assure that a well-informed decision was made not to sit in judgment over assertions arising from cutting edge research. 9. See Society for the Protection of the Harbour Ltd v. Town Planning Board [2003] HKCU 793, [86]-[87] (Hon Chu J); United States
Import Prohibition of Certain Shrimp and Shrimp Products (1998) AB-1998-4, WT/DS58/AB/R (Appellate Body), [129]; Arbitration Regarding the Iron Rhine Railway (Belgium v Netherlands) (2005), [59]-[60] Available at http://www.pca-cpa.org/showpage.asp?pag_id=1155 [Railway] (accessed on 28 May 2014). 10. (24 May 2005) at pp. 59, 114, Award of the Arbitral Tribunal, online: Permanent Court of Arbitration. 11. See Tikiri Banda Bulankulama and Others v. Secretary, Ministry of Industrial Development (2000) 3 SLR 243 at p. 274. 12. See BP Southern Africa (Pty) Ltd v. MEC for Agriculture, Conservation, Environment and Land Affairs [2004] JOL 12710, 1. 13. AIR 1987 SC 982. 14. Judgment of 2 October 2001; cited in D. Shelton, ‘Human Rights, Health & Environmental Protection: Linkages in Law & Practice’ (2002), Background Working Paper for the World Health Organization, p. 19. Available at http://www. who.int/hhr/Series_1%20%20Sheltonpaper_rev1.pdf (accessed on May 28 2014). 15. D. Shelton, ibid. 16. Shiva writes: ‘Above all, for securing sustainability, we need to recognize the rights of Mother Earth. Here too, Bolivia has taken the initiative by putting forth the Universal Declaration of the Rights of Mother Earth. Human rights to food and water, to land and biodiversity, flow from the rights of the Earth. Any system which pits human rights against Earth rights must undermine both’. 17. Cf. The Trail Smelter Case (1939) AJIL 182; (1941) AJAIL 684. 18. For example sections 17(2) (d) and 20 of the Constitution of the Federal Republic of Nigeria, 1999; Art.’s 48A and 51A (g) of the Constitution (42nd Amendment) Act 1976 of India; Dir. XIII, princ XXVII (i
iii) Constitution of Uganda 1995; Part II Constitution of Tanzania 1997.

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19. (1999) 2 Bom CR 550. 20. Presidente de la sociedad Marlene S.A. v. Municipalidad de Tibas, Sala Constitucional de la corte Supreme de justicia. Decision No. 6918/94. 25 November 1994. 21. For example Section 21 of the Constitution of India
Charan Lal Sahu v. Union of India AIR 1990 SC 1480; Subhash Kumar v. State of Bihar (AIR 1991 SC 420/1991 (1) SCC 598. 22. Dr. M. Farooque v. Bangladesh (1997) 49 Dhaka Law Reports (AD), 1. 23. Waweru v Republic (2006) 1 K.L.R. 677. 24. (2005) AHRLR 151 (NgHC 2005). 25. About 100 Constitutions are identified by Justice Weeramantry in Shelton (2005, p. 7). For example see, Section 24 of the South African Constitution. Article 24 of the African Charter on Human and Peoples Rights (Ratification and Enforcement) Act of Nigeria stipulates a right to a ‘Peoples right’ to a general satisfactory environment favourable to their development. In Gani Fawehinmi v. Sani Abacha (2000) 4 S.C. 22, the Nigerian Supreme Court held that the Charter having been ratified formed part of the domestic law and took precedence above all other laws but not above the Constitution. 26. Asociacion Para la Proteccion de Medio Ambiente y Educacion Ecologica ‘18 de Octubre’ v Aguas Argentinas S.A. & otros, Federal Appellate Tribunal of La Plata (2003). 27. Fundepublico v. Mayor of Bugalagrande y otros, Juzgado Primero superior, Interlocutorio # 032, Tulua, 19 December 1991. 28. Antonio Horvath Kiss y Otros v. National Commission for the Environment, Supreme Court, 19 March 1997. 29. AIR 2006 SC 1350. 30. See note 7 above. 31. Fifteenth Annual activity report of the African Commission on Human and Peoples Rights 2001
2002. Communication 155/96, Decision of the African Commission on Human and Peoples’ Rights, done at the 30th Ordinary Session, held in Banjul, Gambia, 13
27 October 2001 (interpreting this right under the African Charter). Available at http://www.cesr.org/downloads/AfricanCommission Decision.pdf (accessed on May 28 2014). 32. Cf. Delhi Bottling Co. Pvt. Ltd. v. CPCB, 1986 Del 152, where the court observed that development was a right. 33. 1999 (2) SA 709 (A). 34. For example Sinaltrainal v. Coca-Cola Co 578 F.3d 1252 (11th Cir. 2009), Romero v. Drummond Co., Inc., 552 F.3d 1303 (11th Cir. 2008); Presbyterian Church of Sudan v. Talisman Energy, Inc, 582 F.3d 244 (2nd Cir. 2009); Doe I. v. Unocal, 395 F.3d 932 (9th Cir. 2002). 35. Kiobel v Royal Dutch Petroleum 06-4800-cv, 06-4876-cv (2d Cir. 17 September 2010). 36. 557 F. Supp. 2d 1080 (N.D. Cal. 2008). The court held that Texaco was not complicit in the abuses committed by State agents. 37. 2009 WL 1560197 (2d Cir. 3 June 2009). 38. 542 U.S. 692 (2004). 39. At pp. 17
30. 40. At pp. 30
35.

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41. For example, Vela´squez-Rodrı´guez v. Honduras Inter-American Court of Human Rights, Judgment of 29 July 1988, Inter-Am Ct. H.R, (Ser. C) No. 4 (1988); Kalender v. Turkey, No.4314/02, 15 December 2009, ECHR 2009; SERAP v. Federal Republic of Nigeria, The Court of Justice of the Economic Community of West African States (ECOWAS), Judgment of 14 December 2012, No. ECW/CCJ/ JUD/18/12. 42. For example Awas Tingni Mayagna (Sumo) Indigenous Community versus Nicaragua case Mayagna (Sumo) Inter-Am. Ct. Hum. Rts. (Ser. C) Case No. 79, para. 103(k) (Judgment of August 31 2001). Available at http://www.corteidh.or.cr/ seriecing/serie_c_79_ing.doc (accessed on 28 May 2014). 43. For example Lo´pez Ostra v. Spain, Application No. 16798/90, judgment of 9 December 1994; Fadeyeva v. Russia, Application No. 55273/00, judgment of 9 June 2005 Costello-Roberts v. the United Kingdom, Application No. 13134/87, judgment of 25 March 1993. 44. See the South African cases of Fuel Retailers Association of Southern Africa v. Director General Environmental Management, Dept. Of Agriculture, Conservation and Environment Mpumalanga Province 2007 10 BLCR 1059 (CC) and Bengwenyama Minerals (pty) Ltd. and Others v. Genorah Resources (Pty) Ltd and Others (CCT 39/ 10) [2010] ZACC 26. 45. ECW/CCJ/APP/07/10 of 10 December 2010. 46. ‘ECOWAS Court rules on oil pollution: says FG, NNPC can be sued’, Africa.com, 19 January 2011. Available at http://allafrica.com/stories/20110120 0394.html (accessed on 28 May 2014). 47. Application No. 46117/99, judgment of 9 December 1994. 48. Cour de Cassation (Chambre Sociale), judgment No. 4164, 2 October 2001. 49. ibid., pp. 21
22. 50. Case C-281/02, 2005 E.C. R. OJ C 106. 51. [2000] 1 W.L.R. 1545. 52. ‘We need a World Court of Human Rights’
UN expert tells Common wealth’, Commonwealth Secretariat, 3 June 2009. Available at http://www.the commonwealth.org/news/34580/211471/205483/030609un_special_rapporteur.htm 53. ibid. 54. At p. 273. 55. See note 45 above.

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92. Rose, G. (2011). Gaps in the implementation of environmental law at the national, regional and global level. Kuala Lumpur: United Nations Environment Programme. Rosencranz, A. (2003). The Delhi pollution case: The supreme court of India and the limits of judicial power. Columbia Journal of Environmental Law, 28, 223
249. Sands, P. (2003). Principles of international environmental law. Cambridge: Cambridge University Press. Sands, P. (2006). Lawless world: America and the making and breaking of global rules. London: Penguin. Senger, D. S. (2007). Environmental law practices. New Delhi: Hall. Shelton, D. (2005). Judicial Handbook on environmental-law. Retrieved from www.unep.org/ dpdl/law; http://www.unep.org/delc/Portals/119/publications/Judicial-Handbook-Environ menal-Law.pdf. Accessed on August 30, 2014. Shiva, V. (2010). The elusive search for sustainability. This is Africa: A Global perspective. September 17. Retrieved from http://web.thisisafricaonline.com/2010/09/17/vandanashiva-the-elusive-search-for-sustainability. Accessed on August 30, 2014. Singh, N. (1988). Sustainable development as a principle of international law. In P. P. De Wart (Ed.), International law and development (p. 1). Boston, MA: Martinus Nijhoff. Srivastava, Y. K. (n.d.). Sustainable development: Environmental law project. Scribd. Retrieved from http://www.scribd.com/doc/30741862/SUSTAINABLE-DEVELOPMENT. Accessed on August 28, 2014. Stavins, R. N. (2011). The problem of the commons: Still unsettled after 100 years. American Economic Review, 101(1), 81
108. Steele, J. (2010). Tort law: Text, cases, and materials. New York, NY: Oxford University Press. Swart, M. (2010). Judicial Lawmaking at the ad hoc Tribunals: The creative use of the sources of international law and ‘adventurous interpretation’. Max-Planck-Institut fu¨r ausla¨ndisches o¨ffentliches Recht und Vo¨lkerrecht. Retrieved from http://www.zaoerv.de/70_2010/70_ 2010_3_a_459_486.pdf. Accessed on August 28, 2014. Taillant, J. (2003, February). Human rights and sustainable development: A view from the Americas. Retrieved from http://www.cedha.org.ar/docs/doc122-eng.htm. Accessed on August 28, 2014. The Environmental Audit Committee, House of Commons. (2003
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Trevisan, L. (2009). The international court of justice’s treatment of ‘sustainable development’ and implications for Argentina v.Uruguay. Sustainable Development Law & Policy, 40, 85. Ulfstein, G. (2007). Making treaties work: Human rights, environment and arms control. Cambridge University Press. UN Non Governmental Liaison Service. (2002, May). Human rights approaches to sustainable development. NGLS Roundup. Retrieved from http://www.un-ngls.org/orf/pdf/ru90 hrsd.pdf. Accessed on August 28, 2014. Vining, J. M. (2008). The distinction between humans and nature: Human perceptions of connectedness to nature and elements of the natural and unnatural. Human Ecology Review, 15(1), 1
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774. Witte, J. M. (2005). Business unusual: Facilitating United Nations reform through partnerships. United Nations Global Compact Office. Zilberman, D. (2011). Economics of global trade and global ecosystem services. In T. Koellner (Ed.), Ecosystem services and global trade of natural resources: Ecology, economics and policies (pp. 29
39). Oxford: Routledge.

SUSTAINABLE PROCESSES AND PRODUCTION METHODS (PPMS) IN PRIVATE STANDARDS: A PROXY FOR TRADE BARRIERS OR DECENTRALISED MECHANISMS FOR ENVIRONMENTAL GOVERNANCE? Maria Alejandra Calle ABSTRACT Purpose
This chapter provides a legal and theoretical overview of environmental PPMs articulated in private standards. It seeks to expand the debate about environmental PPMs, elucidating important dimensions to the issue from the perspective of global governance and international trade law. One of the arguments advanced in this chapter is that a comprehensive analysis of environmental PPMs should consider not only

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 117
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their role in what is regarded as trade barriers (governmental and market driven) but also their significance in global objectives such as the transition towards a green economy and sustainable patterns of consumption and production. Methodology/approach
This chapter is based on an extensive literature review and doctrinal legal research. Findings
This research shows that environmental PPMs represent a key issue in the context of the trade and environment relationship. For decades such measures have been thought of as being trade distortive and thus incompatible with WTO law. Although it seems clear now that they are not unlawful per se, their legal status remains unsettled. PPMs can be regarded as regulatory choices associated with a wide range of environmental concerns. However, in trade disputes, challenged measures involving policy objectives addressing production issues in the conservation of natural resources tend to focus on fishing/harvesting techniques. On the other hand, an important goal of Global Environmental Governance (GEG) is to incentivise sustainable consumption and production in order to achieve the transition to a green economy. In this sense, it can be argued that what are generally denominated as ‘PPMs’ in the WTO terminology can alternatively be regarded ‘SCPs’ in the language of environmental governance. Environmental PPMs are not only limited to state-based measures, such as import bans, tariff preferences, and governmental labelling schemes. Environmental PPMs may also amount to good corporate practices towards environmental protection and provide the rationale for numerous private environmental standards. Practical implications
Most academic attention afforded to environmental-PPMs has focused on their impacts on trade or their legality under WTO law. Although legal scholars have already referred to the significance of such measures in the context of environmental governance, this issue has remained almost entirely unexplored. This chapter seeks to fill the gap in the literature in this regard. In particular, it addresses the relevance of environmental PPMs in the context of decentralised governance initiatives such as the UN Global Compact and private environmental standards. Originality/value
Overall, this chapter assists in the understanding of the significance of environmental PPMs in the context of private environmental standards and other governance initiatives involving goals related to sustainable consumption and production. This chapter adds to the

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existing body of literature on the subject of PPMs in international trade and environmental governance. Keywords: Private environmental standards; sustainable production methods; international trade law; international environmental governance

INTRODUCTION The notion of Process and Production Methods (PPMs) has been the subject of one of the most complex controversies concerning trade and environment in the World Trade Organisation (WTO) (Charnovitz, 2002; Tietje, 2006; Van den Bossche, Schrijver, & Faber, 2007). PPMs can be defined as trade measures intended to address concerns about the manner in which a product is produced or harvested. It should be clarified that PPMs are not only relevant in the context of environmental protection but also in other areas of social concern, including the use of child, forced, prison and slave labour (see Read, 2005). It is beyond the scope of this chapter to analyse social issues embodied in the concept of sustainable development. Instead, this chapter will focus on PPMs associated with the sustainable use of natural resources. Although environmental concerns associated with production methods can give rise to import prohibitions, they may also condition the granting of tariff preferences or serve as the rationale for various private or governmental labelling schemes. PPMs are also seen as a feature of environmental law (Charnovitz, 2002, p. 70). In this context, it is debated whether the implementation of environmental treaties may give rise to this type of measure and also whether countries may resort to unilateral PPMs in order to enhance the effectiveness of International Environmental Law (see Charnovitz, 2002). For decades measures based on environmental PPMs have been thought of as being trade distortive and thus incompatible with WTO law. However, their legal status remains unsettled. The silence of WTO adjudicatory bodies on the question of legality of PPMs can be explained by the fact that the issue ‘as such’ has not been brought in dispute settlement. The use of unilateral measures in trade policy has often been viewed unfavourably, especially when such measures are deemed to have extra-territorial effects insofar as they are used in order to influence another Members’

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policy towards environmental protection. As observed below, this raises the issue of state sovereignty (see Condon, 2006; Howse & Regan, 2000). Nielsen and Calle (2013) note that ‘PPMs have historically been considered problematic because they by their nature “regulate” a process or production method outside the WTO Member enacting them’ (Nielsen & Calle, 2013, p. 21). This type of measure often requires that trading partners have to change their production method in order for their products to gain access to the market of the Member setting such environmental policy. In this sense, they are usually regarded as extra-burdens for exporters. This perception can be identified in authors such as Hudec (1998) who thinks that domestic regulations based on PPMs have the potential to create negative trade effects (even if unintended) and to give local producers a competitive advantage (Hudec, 1998). However, it is possible to envisage a situation where another trading partner has the competitive advantage of sustainable production
in spite of Hudec’s predictions. Despite the fact that positive trade impacts of PPMs are less explored in the literature, there are some voices that challenge the assumption that PPMs necessarily undermine market access, particularly for developing countries. For example, Fisher (2001) believes that sustainable or ethical PPMs can enhance trade liberalisation when they are implemented in accordance with principles of transparency, non-discrimination, proportionality, and special and differential treatment for developing countries. This may include technology transfer, use of transitional periods and technical equivalence in eco-labels. According to this view, PPMs may act as trade incentives when conditioning lower tariff rates for products, particularly originated in developing countries. It follows that when PPMs are adopted as tariff incentives, they not only help to liberalise trade but also have an impact on investment and production decisions in third countries, who may also want to take advantage of these opportunities (Fisher, 2001). A similar approach can be found in Benoit (2011) who analyses the case of tariff advantages given to sustainable ethanol conditioned on greenhouse gas emission life-cycle assessments. Just as it was generally argued that PPMs were WTO incompatible, it was also assumed that unilaterally imposed PPMs infringed sovereignty
or at least raised serious sovereignty issues (see Nielsen, 2007). For instance, in the context of eco-labelling schemes, it believed that ‘Northern’ preferences for environmental PPMs are ‘forced’ upon exporters from developing countries for whom it is quite costly to abide by high technical standards and who may not participate in international standardising bodies (Verbruggen & Kuik, 1997, p. 411). In the WTO, Members’

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preferences for ‘environmentally friendly’ or ‘sustainable’ production methods are still regarded with suspicion. It is feared that PPMs may lead to ‘green protectionism’1 (see Charnovitz, 2002; Dro¨ge, 2001; Steenblik, 2009) and discriminatory treatment of imported products. Commentators such as Gsto´hl and Kaiser (2004) suggest that the need for more specified regulation of products and PPMs increases with the rapid growth of global trade (Gsto´hl & Kaiser, 2004). The debate surrounding the issue of environmental PPMs is also indicative of tendency to interpret regulatory preferences as non-tariff barriers. Lang (2011) points out that nowadays virtually all aspects of WTO Member’s domestic policies can potentially be considered as non-tariff barriers. This suggests that the evaluation of governmental intervention can be assessed ‘by reference to an imagined ideal of a market which is free and undistorted, characterized by fair competition between foreign and domestic products’ (Lang, 2011, p. 223). However, he notes, that in practice, trade distortions can be also interpreted as ‘commercially significant institutional or regulatory differences’ between WTO Members. The argument of Lang is therefore that different regulatory cultures can give rise to claims of trade distortions (Lang, 2011, p. 227). Environmental protection amounts as one of the grounds in which regulatory differences often arise, and PPMs are perhaps the most controversial type of environmental nontariff barriers. The use of trade measures based on environmental PPMs has been a contentious issue in trade disputes,2 and also in several debates within WTO bodies such as the Committee on Trade and Environment (CTE) and the Technical Barriers to Trade (TBT) Committee.3 The subject has also emerged within the on-going Doha Round of Negotiations, particularly in the context of Agriculture and the liberalisation of environmental goods and services (see Khatun, 2010; Vikhlyaev, 2001).

THE CONCEPT AND TAXONOMY OF PPMS The issue of environmental PPMs is inherently related to the evolution of the trade and environment debate at the WTO. Although the importance of global environmental concerns was formally acknowledged in the Declaration of the United Nations Conference on the Human Environment of 19724 academic discussions about the trade effects of environmental policies gained momentum during the GATT (General Agreement on

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Tariffs and Trade) years5 (Charnovitz, 1992; Esty, 1994; Jackson, 1992; Schoenbaum, 1992). The initial stage of the debate about environmental PPMs was particularly shaped by the so-called ‘product-process doctrine’6 or ‘product-process distinction’ (Howse & Regan, 2000). Under this doctrine, product distinctions based on the characteristics of the production method or the producers were regarded as a priori illegitimate (see Hudec, 1998). It was feared that allowing product distinctions based on PPMs rather than the physical characteristics or quality of products would create a loophole in the GATT (Conrad, 2011). As suggested by Conrad (2011), the concern was that, with this loophole, countries would be allowed to link trade measures with virtually all aspects subject to national regulation, including the protection of labour or minority rights, religious requirements or cultural traditions (Conrad, 2011). PPMs have been traditionally classified into two categories: Product Related PPMs (PR-PPMs) and Non-Product Related PPMs (NPR-PPMs). This classification is widely used in the literature, and within international organisations, including the WTO, the Organisation for Economic Co-operation and Development (OECD), the United Nations Conference on Trade and Development (UNCTAD), and the Food and Agriculture Organization (FAO). PR-PPMs refer to processes affecting the expected physical characteristics of finished products, including, their composition, colour, size, design features and functionality. These process-based concerns are associated with the impact of the method of production on the safety and quality of the product. A classic example is Kosher or Halal slaughtering (Nielsen, 2007). In this sense, in respect of concerns related to PR-PPMs, the process has a direct impact on the product characteristics even though the process may remain unknown to the final consumer. Therefore, it is possible to establish a nexus between process and the expected product attributes (e.g. safety considerations regarding the use of hormones in meat production or pesticide residues in non-organic agricultural production). The rationale behind measures based on PR-PPMs is thus to ensure the functionality of the product or to safeguard consumers (Charnovitz, 2002). In contrast, the category of NPR-PPMs relates to other concerns stemming from the production stage. Consider, for instance, measures addressing the environmental impact generated by the method of production or standards promoting socially responsible production. Provided that such processes do not affect the external physical characteristics of products, NPR-PPMs are also known as ‘unincorporated’ PPMs. In this type of measure, importance is attributed to life-cycle considerations7 and

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environmental impacts associated with a certain production method. NPR-PPMs address a broad range of regulatory preferences related to the use of sustainable practices, consumer information social and environmental values. An example of NPR-PPMs might be labelling requirements for sustainably sourced products, animal welfare standards and fair trade. As NPR-PPMs can reflect existing social and environmental values associated with the production of goods, they can inform purchase or consumption decisions in consumers and retailers. In 1997, the OECD developed a taxonomy of environmental NPR-PPMs. This classification focuses on the scope of the environmental effect created by the production method, that is to say, the production externality (OECD, 1997).8 However, it is worth mentioning that in that the classification of PPMs as ‘product related’ and ‘non-product related’ is often criticised as being artificial. Tietje (2006) observes that such a distinction ‘hides the underlying problem of PPMs’ as it underscores the assumption that these measures must have a product relation in order to fit into the ‘product-related rules’ of WTO law (Tietje, 2006). Charnovitz (2002) has also identified conceptual dilemmas in this traditional classification. He is troubled by the ‘simplicity’ of such categorisation considering, for instance, that ‘no PPM is employed without reference to some product’. Charnovitz (2002) also finds it problematic that consumers’ preferences can be ‘neatly’ categorised either as related to physical characteristics of the product or to a wide range of ethical and ecological concerns. Lastly, he notes that an additional difficulty stemming from this classification relates to the fact that measure can have different purposes (e.g. to address ecological impacts of the production or to avoid risks for human health). In this context, the same regulation or standard could be classified as ‘non-product related’ or ‘product related’ depending on the stated objective of the measure (Charnovitz, 2002). The situation described above would be particularly evident in measures related to agricultural production (see Tothova, 2009), or labelling schemes with a plurality of objectives. For example, in the US-Tuna II (Mexico) dispute,9 the objective of the labelling scheme was double: consumer information and dolphin protection. The measure scrutinised in US-Tuna II (Mexico)
a voluntary environmental labelling scheme addressing dolphin mortality
can be regarded as a classic example of an environmental NPR-PPM. Other approaches in the literature about PPMs focus on process information. Kysar (2004) observes that process information often refers to environmental effects associated with the production of goods, including

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the use of controversial techniques such as genetic modification, and any other social, economic or environmental circumstances. In his view, although these circumstances are not inherently related to the ‘functioning, performance, or safety of the product, they nevertheless can, and often do, influence the willingness of consumers to purchase the product’ (Kysar, 2004, pp. 408
411).10 Other authors refer to process-based measures as ‘non-physical aspects of the products’ (NPAs). This particular concept has been developed by Conrad (2011) when discussing measures establishing distinctions ‘between physically identical products based on aspects not revealed in the product itself’ (Conrad, 2011, p. 2). In her analysis, NPR-PPMs are considered examples of NPAs.

ENVIRONMENTAL PPMS: IMPORTANT STEPS TOWARDS SUSTAINABLE DEVELOPMENT? The legality of trade measures based on environmental PPMs touches upon questions such as whether the objective of trade liberalisation can coexist with evolving global challenges, particularly with the pressing need of encouraging more sustainable consumption and production (SCP). The UN General Assembly in Resolution A/RES/66/288 (2012) observed that ‘changing unsustainable and promoting sustainable patterns of consumption and production’ is among the ‘overarching objectives of and essential requirements for sustainable development’. In addition, it emphasised that green economy policies in the context of sustainable development should promote such changes.11 In the past few decades, environmental concerns have been mainly associated with the negative effects of production methods on the environment (see Kletzan, Ko¨ppl, & Kratena, 2002). In fact, it can be argued that SCP has become an important goal of Global Environmental Governance (GEG).12 It is also generally accepted that a transition to a green economy also depends upon significant changes in patterns of consumption and production (see UNEP, UNCTAD, & UNDESA, 2011). In such a context, environmental PPMs may play a crucial role, particularly considering that ‘how a product is made is one of the most important determinants of its final environmental impact’ (UNEP et al., 2011, p. 56). This underscores the validity in arguing that environmental PPMs can
and perhaps should
be considered as green economy measures.

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The importance of Environmental PPMs is also apparent in governance initiatives such as the UN Global Compact. This initiative seeks to engage companies in promoting and embracing core values related to human rights, labour standards, environmental protection and anti-corruption. In this sense, the Global Compact is seen as the ‘leadership platform for the development, implementation and disclosure of responsible corporate policies and practices’.13 Although the links between the UN Global Compact, international trade and sustainability have been explored by authors such as Ruggie (2001), The´rien and Pouliot (2006) and Cetindamar and Husoy (2007) this chapter draws attention to the relevance of environmental PPMs in the context of this global corporate sustainability initiative. It thus argues that by acting as a driving force for the adoption of environmentally responsible behaviour (Cetindamar & Husoy, 2007, p. 164), the UN Global Compact gives significance to SCP. The environmental dimension of the corporate sustainability promoted by the UN Global Compact stems from the adoption of the following principles: ‘businesses should support a precautionary approach to environmental challenges’ (Principle 7), ‘undertake initiatives to promote greater environmental responsibility’ (Principle 8), and ‘encourage the development and diffusion of environmentally friendly technologies’ (Principle 9). Environmental PPMs have particular significance within these principles. Principle 7 clearly promotes investing in sustainable PPMs. It is noted that ‘investing in production methods that are not sustainable (i.e. that deplete resources and degrade the environment) has a lower, long-term return than investing in sustainable operations’ (UN, 2014b). In terms of Principle 8, it is also suggested that one of the steps that companies may take in order to promote greater environmental responsibility relates to the establishment of a ‘sustainable production and consumption programme with clear performance objectives’ (UN, 2014b). On the other hand, Principle 9 emphasises the importance of environmentally sound technologies. Besides their positive environmental benefits, such technologies are believed to increase the competitiveness and efficiency of the company. Cetindamar and Husoy (2007) note that, from an economic perspective, ‘environmentally conscious behaviour’ spurs technological innovation. In their words, ‘being environmentally conscientious might involve investments in technology, methods, tools, and raw materials that are higher than is the case for the environmentally indifferent’ (Cetindamar & Husoy, 2007, p. 166). These authors further suggest that the adoption of ‘environmentally conscious behaviour’ can become a source of technological

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innovations that may benefit both companies and society (Cetindamar & Husoy, 2007, p. 166). It should be observed that the concept of environmentally friendly/sound technologies provided in the UN Global Compact is defined by reference to the UN Commission on Sustainable Development (Agenda 21). This broad definition also encompasses sustainable PPMs.14 It is worth mentioning that when assessing corporate actions on the aforementioned environmental principles, numerous elements are taken into account.15 These include, for example, impact and risk assessment, water footprint, life-cycle assessment and costing, consumption and responsible use, cleaner and safer production.16 These two last elements can be easily associated with environmental PPMs. The data presented in the 2013 Corporate Sustainability Snapshot indicates that 65% of the companies that have joined the UN Global Compact have taken specific actions in consumption and responsible use. Similarly, 62% of the companies have taken steps for cleaner and safer production (UN, 2013). In spite of the above, it is important to clarify that the UN Global Compact is not a code of conduct for corporate behaviour. It is rather a policy framework ‘for organizing and developing corporate sustainability strategies’.17 The difficulties for the adoption of a UN Global Compact code of conduct may stem, for instance, from the lack of a precise definition of many of its guiding principles (see Ruggie, 2001). One of such difficulties in the field of environmental protection relates to the lack of consensus in the definition of the ‘precautionary principle’ (Ruggie, 2001). Commentators in the field of international environmental law have drawn attention to relevant issues in the implementation of the precautionary principle. Freestone and Hey (1996) point out that insofar as the precautionary concept can be implemented in different ways, it should not be associated with any particular type of measure. In their view, the precautionary concept relates to the ‘way’ and ‘time’ in which measures have to be adopted in order to protect the environment (Freestone & Hey, 1996, p. 12). It is further noted that, from a legal perspective, the main feature of the precautionary principle is that ‘positive action to protect the environment may be required before scientific proof of harm has been provided’ (Freestone & Hey, 1996, pp. 12
13). Whether the precautionary concept may also relate to alternative methods of production, such as clean methods is open to debate. Should the answer be affirmative, the next question would be whether the precautionary approach can support the use of PPMs as a way to prevent, and not only to correct environmental externalities (i.e. to address

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environmental risks deriving from economic activities). According to Nollkaemper (1996), the analysis of the precautionary principle should consider the balance between environmental protection and socio-economic interests. In his opinion, environmental interests are too often the victim of under-estimation of risks (Nollkaemper, 1996). Environmental PPMs are often intended to prevent or minimise environmental damage and to promote good environmental practices and technologies.18 In consequence, if accepting that the lack of scientific certainty ‘shall not be used as a reason for deferring measures to enhance the quality of the environment’ (McIntyre & Mosedale, 1997, p. 236) the logical consequence would be that clean and sustainable production methods could implement the precautionary principle.19 Besides companies, governments themselves use trade measures to address public policy concerns, including environmental PPMs. Gaines (2002) points out that the number of PPM measures applied outside the realm of food safety seemed to be small and limited almost exclusively to the regulation of harvesting methods associated with natural resources such as fish and timber (Gaines, 2002, p. 3). However the WTO draws attention to the increasing use of ‘non-tariff barriers’ (NTBs). Some of these NTBs relate to concerns such as consumer protection and information, climate change and environment-friendly production methods (WTO, 2012). The 2009 WTO-UNEP Report on Trade and Climate Change also refers to the existence of PPMs in standards and labelling schemes related to energy-efficiency and emission-reduction (Tamiotti et al., 2009). The subject of environmental PPMs has also emerged during the Doha negotiations on ‘Environmental Goods and Services’ (EGS).20 It should be recalled that the Doha Declaration does not provide a definition or a classification for EGS, and in consequence, a contentious aspect of the negotiations relates to the definition and scope of this concept (i.e. ‘what’ products can be defined as EGS). Although a detailed analysis of EGS is not provided in this chapter, it is important to acknowledge that a relevant part of the discussions touches upon the role of environmental PPMs in the definition of EGS (i.e. the question whether the selection of EGS should be based on their end-use or consider broader categories). In a study about ‘trade preferences for environmentally friendly goods and services’ Monkelbaan (2011) shows that two categories of EGS have been discussed so far: ‘Traditional Environmental Goods’ and ‘Environmentally Preferable Products’ (EPPs). The first category has the purpose of ‘addressing or remedying an environmental problem such as carbon capture and storage technologies’. In contrast, the second category

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includes ‘any product with certain environmental benefits arising either during the production, use or disposal stage relative to a substitute or “like” product’ (Monkelbaan, 2011, pp. 2
3). The concept of EPPs gives particular relevance to NPR-PPMs (e.g. sustainability criteria, life-cycle assessment and carbon footprints).21 It is argued that in the production of traditional environmental goods such as ‘end-of pipe’ goods and clean technologies, developed countries and some middle-income developing economies in Asia have a competitive advantage, particularly because they have the technology and necessary equipment to produce such goods.22 On the contrary, different export sectors of interest for developing countries come within the scope EPPs. For this reason it is believed that EPPs can favour developing countries, not only in terms of sustainable development benefits but also in terms of market opportunities. Monkelbaan (2011) notes that developing countries have important export potential for EPPs such as sustainable tourism, sustainable organic agriculture, sustainable forestry and sustainable fisheries. However, he also observes that an important source of concern in developing countries is that EPPs would require third-party certification or eco-labels (Monkelbaan, 2011, p. 3). In other words, the perception is that non-tariff barriers can undermine market opportunities for EEPs originated in developing countries. Khatun (2010) claims that some EPPs may cause environmental damage at some point of their production. She uses the example of biofuels, noting that the production process of these goods may not be only energy and water intensive but also polluting. Therefore, classifying products such as biofuels in the category of environmental goods would require a life-cycle analysis. The argument drawn by Khatun (2010) is that the environmental benefits of other EPPs of export interest to many ‘Least Developed Countries’ (LDCs), including forestry and fisheries, would also require an assessment on the basis of PPMs. This would ultimately lead to labelling and certification schemes (Khatun, 2010, p. 21). It has been a matter of debate whether the Doha mandate on EGS refers not only to manufactures but also to agricultural goods, for example, organically produced products. The WTO Membership appears to be divided over this question.23 Once again, the concern is that including agricultural products in the category of EGS may require considering standards and certifications in the Doha Round.24 One of the thorny issues within the on-going negotiations is whether sustainable NPR-PPMs can be considered as a basis to define environmental goods. It is also uncertain whether EPPs, which give particular relevance to PPMs, can fall within the scope of the Doha mandate.25 Vikhlyaev (2001) points out that the use of PPMs as a

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criterion to define the concept of ‘environmental goods’ has been controversial among the majority of WTO Members, particularly because they believe that ‘this can create a new set of standards, prompt changes in customs classifications or lead to systemic problems’ (Vikhlyaev, 2001, p. 42). In sum, it can be argued that sustainable PPMs are encouraged by voluntary initiatives such as the UN Global Compact (i.e. as a form of good corporate practices towards environmental protection). In contrast, the issue remains contentious in the WTO, particularly among developing countries. The proliferation of private environmental standards is a more recent feature of the debate about environmental PPMs. This issue is discussed later.

SUSTAINABLE PPMS IN PRIVATE ENVIRONMENTAL STANDARDS Environmental or sustainable PPMs can provide the rationale for standards and labelling schemes developed by non-governmental organizations (NGOs). Private environmental standards are usually articulated in producer certification and product labelling systems that include an auditing third party (Bernstein & Hannah, 2008, pp. 575
576). Bernstein and Hannah (2008) consider such private mechanisms as a sub-set of the broader category of corporate social responsibility (CSR);26 however, they emphasise ‘their similarity to state-based regulatory and legal systems’ (Bernstein & Hannah, 2008, p. 576). Other authors also suggest that private certifications may act as a functional equivalent to state approval (Dimitropoulos, 2011, p. 396). Private standards often seek to govern production methods associated with social and environmental objectives (Cashore, 2002; Wouters, Marx, & Hachez, 2012). One relevant example relates to the social and environmental conditions of production providing the rationale for a large number of widely known labelling schemes supported by the Global Association for Social and Environmental Standards Systems (ISEAL Alliance).27 Private standards may also combine objectives such as food safety with the promotion of sustainable PPMs.28 Bernstein and Hannah (2008) note that standards developed by ‘non-state market driven’ (NSMD) governance systems can be found in numerous different sectors, such as forestry, apparel, tourism, agriculture, fisheries and food. Although the concept of NSMD governance systems is discussed further below, it is important to note here that these private mechanisms operate

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independently from states. In this sense, they differ from traditional standard-setting bodies such as the Codex Alimentarius or the International Organization for Standardization (ISO) (Bernstein & Hannah, 2008, p. 576). The scope of sustainability standards is very broad and frequently includes concerns associated with the protection of biodiversity, sustainable fisheries, climate change and organic agriculture. The importance of PPMs relates, inter alia, to the use of traditional knowledge to protect biodiversity (this include hunting and fishing methods), animal welfare, sustainable forestry operation, responsible sourcing, deforestation, bycatch prevention, sustainable aquaculture, resource-efficient agriculture, sustainable biofuels and ecological farming.

PRIVATE ENVIRONMENTAL STANDARDS BASED ON PPMS: A NEW SOURCE OF NON-TRADE BARRIERS? Conflicts may arise between private environmental standards and government-based regulations, particularly WTO law (see Meidinger, 2000, p. 233). The increasing proliferation of private environmental standards is seen as threatening the multilateral trading system and the legitimacy of the WTO (see Bernstein & Hannah, 2008; Wouters et al., 2012). There is a fear that such standards can represent a new source of trade barriers, particularly for developing countries. The proliferation of private environmental standards is highly controversial, not only because of their consequences for international trade, but also because it is not clear whether WTO law can regulate them. Although these standards are not legally binding they can nonetheless be de facto mandatory for retailers and importers (WTO, 2012, p. 11). It is clear that firms are increasingly using private environmental standards in order to address the challenges in governing their supply chains and the growing environmental sensitivity of consumers (WTO, 2012). The case of agro-business is an illustrative example of the use of patterns of consumption and production as ‘opportunities for alternative productionbased and distribution-based social differentiation’ (Gonzalez-Perez, 2013a, 2013b, p. 13). It is also worth mentioning that the importance of private standards is recognised by governments in their procurement policies (Wouters et al., 2012, p. 304). Market access concerns also stem from the fact that numerous private environmental standards encouraging sustainable production and

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consumption are based on NPR-PPMs. Questions continue to arise regarding the role of the WTO with respect to private standards, and ‘while some Members see no place for this discussion in the WTO, others are keen to engage’ (WTO, 2012, p. 14). The responsibility of governments with respect to private standards is therefore a matter of debate. Kudryavtsev (2012) observes that under WTO law, Members ‘have rights and obligations, which may not be directly applicable to private standardsetting organisations’. In consequence, he notes, it would be for WTO Members to discipline private trade restrictive behaviour (Kudryavtsev, 2012). It is important to note that Article 3 of the TBT Agreement provides that, with respect to their local government and non-governmental bodies within their territories, Members shall take such reasonable measures as may be available to them to ensure compliance by such bodies with certain provisions of the agreement. In addition, Article 4.1 relates to the preparation, adoption and application of standards. This particular provision is of great significance as it refers to the ‘Code of Good Practice.’29 However, it is still unclear whether these and other provisions within the TBT Agreement are directly applicable to private standard-setting organisations. In this sense, it remains to be seen how a WTO Member can discipline private standards developed by global NGOs. Kudryavtsev (2012) also notes that it is not fully clear what is the scope and meaning of the obligations stated in Article 4.1 (Kudryavtsev, 2012, p. 20). On the other hand, private sustainability standards can also be difficult to discipline by means of domestic measures, especially because standard-setting activity may take place in multiple jurisdictions. Moreover, in absence of substantive WTO obligations applying to such standards, it seems challenging to identify a possible criterion to determine to what extent a private standard can be trade distortive.30 It should be noted that from the perspective of global governance, credibility, transparency, accountability and stakeholder participation in standard setting are a great source of concern. The ISEAL Alliance is perhaps the most notable example of a global NGO concerned with such issues in social and environmental private standards. This organisation has developed ‘Codes of Good Practice’ assessing the credibility of such standards. These codes relate to all steps of standard-setting, impact evaluation and assurancecertification and accreditation (ISEAL, 2014). It is worth noting that ISEAL’s standard setting code seeks to complement and coexist with the ‘Code of Good Practice’ of the TBT Agreement and with the ‘Code of Good Practice for Standardization’ developed by ISO. However, according

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to ISEAL, such codes ‘are not relevant in their entirety to social and environmental standards’ (ISEAL, 2010, p. 12). Authors such as Gandhi argue that private standards are likely to be subjected to WTO law. He is of the view that ‘as a result of such WTO scrutiny, private standard-setting organizations will be required to adhere to world trade rules and the principle of non-discrimination’ (Gandhi, 2007, p. 20). However, it remains to be seen whether private standards, in which governments are not involved, can be covered by WTO rules and be scrutinised by WTO adjudicatory bodies. Conversely, WTO law might apply when such standards receive ‘substantial support’ of the government. That is to say, when the government support or incentivise their adoption and application.31 Kudryavtsev (2012) points out that ‘concluding otherwise would allow WTO Members to escape the responsibility by hiding behind a “private veil”’ (Kudryavtsev, 2012, p. 27).

GOVERNANCE ISSUES IN PRIVATE ENVIRONMENTAL STANDARDS Private environmental standards based on PPMs can be regarded as a phenomenon of environmental governance. They can act as decentralised32 mechanisms to implement or to further objectives of International Environmental Law and GEG.33 The standards developed by the UEBT are illustrative of this possibility. They build on the principles and criteria established by the UNCTAD Bio Trade initiative (UEBT, 2014). This means that the UEBT standards seek to be in line with key Multilateral Environmental Agreements (MEAs) such as the Convention on Biological Diversity (CBD), the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), the United Nations Convention to Combat Desertification and the Ramsar Convention on Wetlands (UNCTAD, 2007). Wouters et al. (2012) see in private standards a tool for complementing public policy and for the enforcement of public domestic and international law. In their view, such standards are ‘increasingly institutionalised as an instrumental governance tool’ (Wouters et al., 2012, p. 304). Meidinger (2000) also suggests that private environmental standards have the potential of reshaping ‘domestic and international policy institutions by changing the locus, dynamics, and substance of policymaking’ (Meidinger, 2000, p. 125). NGOs are frequently involved in the proliferation of international

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private social and environmental standards (see Bernstein & Hannah, 2008), and it is no surprise that the role of private actors in standard setting is already considered as one of the ‘most dynamic experiments in global governance’ (O’Rourke, 2006, p. 899). NGOs are not only regarded as civil society organisations34 but also as global administrative actors (see Kingsbury, Krisch, & Stewart, 2005, p. 19). They are of great significance in environmental implementation (Najam et al., 2006), the promotion of sustainable consumption and production (UNEP, 2012, p. 24) and in particular areas of GEG such as biodiversity governance (see Bille´, Chabason, Chiarolla, & Jardin, 2010). Whether certifications and labelling schemes can constitute a new type of private governance is a question often addressed in the literature (see Bernstein & Cashore, 2004; Chan & Pattberg, 2008). The approach of NSMD governance systems (Cashore, 2002) can be used to understand the nature of private environmental standards based on PPMs. Bernstein and Hannah (2008) define NSMD governance systems as ‘deliberative and adaptive governance institutions designed to embed social and environmental norms in the global marketplace that derive authority directly from interested audiences, including those they seek to regulate, not from sovereign states’ (Bernstein & Hannah, 2008, p. 580). They also observe that such governance systems attribute particular significance to stakeholder participation, the needs of developing countries, and also try to meet or even exceed the WTO and the ISO guidelines (Bernstein & Hannah, 2008, p. 607). Participation in the process of standard setting has been a source of concern for developing countries. Bernstein and Hannah (2008) are of the view that in the NSMD systems approach, standards based on NPR-PPMs ‘have the potential to be effective and beneficial in the South, but only to the extent that they are developed in a transparent, accessible, and open process’ (Bernstein & Hannah, 2008, p. 604). This clearly suggests that legitimacy concerns in GEG, particularly in the issue of private environmental standards depends to a great extent on participatory mechanisms or stakeholder inclusion.35 Private certifications have an important role in the implementation of local and global environmental regimes (see Dimitropoulos, 2011). This raises the issue of the possible synergies between private environmental certifications and government-based mechanisms. For instance, Long (2010) discusses the importance of integrating non-state certification schemes in publicly created mechanisms such as the United Nations Programme for Reducing Emissions from Deforestation and Forest

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Degradation in Developing Countries (REDD). He thinks that this ‘would represent a significant shift from the current role of private actors within the climate regime, a shift with no apparent parallels elsewhere in international environmental law’ (Long, 2010, p. 46) Eckerberg and Joas (2004) observe that the increasing networking between public and private actors and the shift of responsibility from the public to the private sector have created new forms of GEG (Eckerberg & Joas, 2004). In fact, the term ‘non-governmental governance’ or ‘non-governmental regulation’ is used when referring to this phenomenon (see O’Rourke, 2006). Credibility and effectiveness are further concerns related to the global proliferation of private environmental standards. However, the activities developed by organisations such as the ISEAL Alliance can be regarded as ‘the global reference for good social and environmental standard-setting processes’ (UNEP, 2012, p. 55). The UNEP (2012) points out that the ISEAL’s Codes of Good Practices36 can be used as tools not only to address concerns related to legitimacy, credibility and effectiveness of standard-setting activities, but also to promote sustainable consumption and production around the world. Furthermore, as ISEAL’s good operating practices aim to be consistent with the WTO disciplines of openness, transparency and participation, it is suggested that standard-setting organisations can use such guidelines in order to design and implement private environmental standards. According to the UNEP (2012), this may contribute towards ensuring that those standards will result ‘in measurable progress towards their social and environmental objectives, without creating unnecessary hurdles to international trade’ (UNEP, 2012, p. 55). Kudryavtsev (2012) observes that the WTO should develop ‘specific and flexible rules’ applicable to private standards. Furthermore, in his view, the adoption of a voluntary WTO code of good practices specifically for private standard setting may be a good and realistic step (Kudryavtsev, 2012). However, it remains to be seen how this voluntary code can be implemented in the context of social and environmental standards. It seems difficult to see how an organisation that has been unable to clarify the legal status of environmental PPMs can adopt a code of good practices for standards that are fundamentally based on social and environmental PPMs. In spite of the above, it is believed that private standards can be ruled by principles of Global Administrative Law (GAL)37 (see Gandhi, 2007; Krisch & Kingsbury, 2006). GAL is defined as ‘all the rules and procedures that help ensure the accountability of global administration, and it focuses in particular on administrative structures, on transparency, on participatory elements in the administrative procedure, on principles of reasoned

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decision-making, and on mechanisms of review’ (Kingsbury et al., 2005). It should be clarified that this emerging body of law does not focus on the content of substantive rules within a given regime, including environmental law (Kingsbury et al., 2005). However, the decision-making processes involved in the adoption of private and governmental measures can be scrutinised in the light of its principles, including transparency, participation, reasoned decision-making and accountability.

SUMMARY The proliferation of private sustainability standards is increasingly regarded as a proxy to measures amounting to trade barriers. This issue is highly controversial, not only because the consequences of such measures on international trade, but also because it is not clear whether the WTO can regulate them. It is believed that although these standards are not legally binding, they can nonetheless be de facto mandatory for retailers and importers since they have an impact on market access. Furthermore, it is also argued that private sustainability standards are based on NPR-PPMs’ which are quite contentious. In relation to this type of measure, importance is not only attributed to life-cycle considerations but also to social values associated with production and harvesting methods. Despite the fact that NPR-PPMs constitute one of the most complex legal issues in WTO law, key actors in international trade persist in using measures to address a broad range of concerns, including sustainable production. Although private environmental standards represent an important source of PPMs with possible impacts on trade, they can also be regarded as a phenomenon of environmental governance, namely as a decentralised way to address environmental concerns. Whether these private instruments are beneficial or detrimental for developing countries is a question that would require an economic analysis that is beyond the scope of this chapter. However, it is important to note that this issue certainly expands the debate about trade measures based on environmental PPMs. The links between environmental PPMs and global governance should be further explored by scholars. To date, most of the existing literature focuses on PPMs as trade barriers and not as an issue of environmental governance. It has been beyond the scope of this chapter to engage in discussions about other relevant concerns related to ethical and socially responsible PPMs (i.e. human rights and labour standards). However, this

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research may serve as a basis to explore other issues embodied in the concept of sustainable development and their linkages with SCP and decentralised governance mechanisms.

NOTES 1. Other terms used to refer to the consequences of environmental PPMs are ‘eco-imperialism’ and ‘eco-protectionism’. 2. NPR-PPMs are regulatory choices associated with a wide range of environmental concerns. However, in trade disputes, challenged measures involving policy objectives addressing production issues in the conservation of natural resources tend to focus on fishing/harvesting techniques affecting animal species. The following cases show that concerns associated with fishing and hunting methods have been mainly associated with the protection of marine wildlife. GATT Panel Report, United States
Restrictions on Imports of Tuna, DS21/R, DS21/R, 3 September 1991, unadopted, BISD 39S/155; GATT Panel Report, United States
Restrictions on Imports of Tuna, DS29/R, 16 June 1994, unadopted; Appellate Body Report, United States
Import Prohibition of Certain Shrimp and Shrimp Products, WT/ DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755 and Appellate Body Report, United States
Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products, WT/DS381/AB/R, adopted 13 June 2012 [hereinafter US-Tuna II (Mexico)]. Although involving concerns related to public morality in the seal hunt, the case EC-Seal Products shows the relevance of animal welfare issues associated with hunting techniques. See Panel Reports, European Communities
Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/R and WT/DS401/R (25 November 2013). 3. See for example, Committee on Trade and Environment, Report (1996) of the Committee on Trade and Environment (12 November 1996) WTO Document WT/ CTE/W/40; Committee on Trade and Environment, Report to the 5th Session of the WTO Ministerial Conference in Cancun
paragraphs 32 and 33 of the Doha Ministerial Declaration (11 July 2003) WTO Document WT/CTE/8; Committee on Trade and Environment, Report of the Twenty-First Meeting of the Committee on Trade and Environment in Special Session 1-2 November 2007: Note by the Secretariat (29 April 2008) WTO Document TN/TE/R/21; Committee on Trade and Environment, Report of the Meeting Held on 20 November 2009: Note by the Secretariat (12 January 2010) WTO Document WT/CTE/M/48; Committee on Trade and Environment, Report of the Meeting Held on 29 September 2010: Note by the Secretariat (2 November 2010) WTO Document WT/CTE/M/50. See also, Committee on Technical Barriers to Trade, Specific Trade Concerns Raised in the TBT Committee: Note by the Secretariat (1 June 2011) WTO Document G/TBT/ GEN/74/Rev.8. 4. UNEP Documents, ‘Stockholm 1972
Declaration of the United Nations Conference on the Human Environment
United Nations Environment Programme (UNEP)’. http://www.unep.org/Documents.Multilingual/Default.asp? documentid=97&articleid=1503 (accessed on 9 May 2013).

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5. General Agreement on Tariffs and Trade 1994, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, The Legal Texts: The Results of the Uruguay Round of Multilateral Trade Negotiations 17 (1999), 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994) [hereinafter GATT 1947]. Mentioned here as the de facto organisation until the WTO came into being in 1995 as a de jure Intergovernmental Organization, which GATT never was. It is important to remember that the WTO was established in 1 January 1995 under the Marrakesh Agreement, adopted as a result of the Uruguay Round of Multilateral Trade Negotiations (1986
1994). The Marrakesh Agreement transformed the previous GATT system into a permanent international organisation with legal personality under international law. 6. The ‘product-process doctrine’ has been criticised in the literature. For instance, the opinion of Irwin (2009) is that it emerged from a ‘creative interpretation’ of a GATT panel (i.e. US-Tuna) that gradually took on a life of its own. He points out that although the ‘product-process doctrine’ was never explicitly proposed or endorsed by WTO Members, it still represents a challenge for PPMs (Irwin, 2009). The basis for the product-process doctrine lies in the interpretation of the concept of ‘like products’ in Article III of the GATT (Vranes, 2011). In the assessment of likeness, adjudicatory bodies evaluate different factors such as the physical properties of the products, quality, end-uses, consumers’ tastes and habits, tariff classification and also, competitive relationship between products See GATT Working Party Report on Border Tax Adjustments, GATT BISD 18S/97, 2 December 1970, para. 18. See also Appellate Body Report, European Communities
Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, adopted 5 April 2001, DSR 2001:VII, 3243. 7. That is, to take into account the environmental effects of a product from the first stages of its production to its final disposal. See World Trade Organization, Trade Topics: Environment (Labelling). http://www.wto.org/english/tratop_e/envir_e/ labelling_e.htm (accessed on 29 January 2014). 8. The analytical framework developed by the OECD also analyses different measures associated with the enforcement of PPMs and their possible impact on trade and trade policy. In addition, it also addresses different aspects of particular environmental PPMs, including environmental motivations, feasibility, effectiveness and efficiency, alternatives measures and compatibility with multilateral trade rules (see OECD, 1997). 9. The recent US-Tuna II (Mexico) dispute continued the saga of environmental NPR-PPMs associated with the protection of marine species. The dispute actually relates to similar environmental concerns to those addressed in the previous US-Tuna cases under the GATT dispute settlement system. However, unlike the previous disputes exclusively framed under the GATT, US-Tuna II (Mexico) is already considered as a landmark ruling on the TBT Agreement (Marceau, 2013; Mavroidis, 2013; Wilke & Schloemann, 2011). In this dispute, the WTO adjudicatory bodies scrutinised the requirements imposed by the United Sates concerning the use of the term ‘Dolphin safe’ in a voluntary labelling scheme. The requirements of the United States disqualified Mexican tuna products from using the label ‘dolphin-safe’ when the fishing method was not in accordance with the Provisions of the Dolphin Protection Consumer Information Act.

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10. This issue was recently addressed in the trade dispute US-Tuna II (Mexico) when the panel considered the importance given by consumers to specific non-trade concerns such as tuna caught in conditions harmful to dolphins. 11. Resolution 66/288
The future we want
adopted by the General Assembly, at its Sixty-sixth session (11 September 2012). See paras. 4 and 58. http:// sustainabledevelopment.un.org/futurewewant.html (accessed on May 20 2014). 12. The Conference on Environment and Development (UNCED) held in Rio de Janeiro (1992), and the World Summit on Sustainable Development (WSSD) held in Johannesburg (2002) reaffirmed the importance of changing unsustainable production and consumption. 13. According to the information provided by the Global Corporate Sustainability Report, 8,000 companies in 140 countries have joined this initiative. See United Nations Global Compact https://www.unglobalcompact.org/About TheGC/global_corporate_sustainability_report.html (accessed on 1 September 2014). 14. See UN, ‘Agenda 21
Chapter 34 Transfer of Environmentally Sound Technology, Cooperation and Capacity-building, Earth Summit, 1992’ (UN documents, 2014). http://www.un-documents.net/a21-34.htm (accessed on 25 July 2014, paras. 34.1
34.3). 15. These elements are part of a comprehensive sustainability approach that also assesses practices related to human rights, labour and anti-corruption. 16. See UN Global Compact Corporate Sustainability Snapshot 2013. https:// www.unglobalcompact.org/docs/about_the_gc/Global_Corporate_Sustainability_ Snapshot2013.pdf (accessed on 1 September 2014). 17. UN Global Compact. Frequently Asked Questions. https://www.unglobal compact.org/AboutTheGC/faq.html (accessed on 2 September 2014). 18. According to Freestone and Hey (1996) the precautionary approach entails, inter alia, clean production methods, best environmental practices and best available technology (Freestone & Hey, 1996, p. 13). 19. McIntyre and Mosedale also observe that obligations related to ‘the application of clean production methods or the setting of precautionary standards are almost always associated with the application of the precautionary principle in international instruments’ (McIntyre & Mosedale, 1997, p. 236). 20. Paragraph 31(iii) of the Doha Ministerial Declaration provides the mandate for the reduction or elimination of tariff and non-tariff barriers to trade in environmental goods and services. One of the objectives of these negotiations is to improve ‘countries’ ability to obtain high quality environmental goods at low cost or by enhancing the ability to increase production, exports and trade in environmentally beneficial products’. In addition, the negotiations aim to encourage the use of environmental technologies, for example, stimulating innovation and technology transfer. Committee on Trade and Environment, Special Session: Report by the Chairman, Ambassador Manuel A. J. Teehankee to the Trade Negotiations Committee (21 April 2011) WTO Document TN/TE/20. 21. The term EPPs is defined by UNCTAD as ‘products which cause significantly less environmental harm at some stage of their life cycle (production, processing, consumption, [or] waste disposal) than alternative products that serve the same purpose, or products the production and sales of which contribute significantly to the preservation of the environment’ (Monkelbaan, 2011, p. 3).

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22. The lists developed by the OECD and the Asia Pacific Economic Co-operation Mechanism (APEC) include EGS ‘heavily focused on capital, technology and knowledge-intensive goods’ (see Lendo, 2005). 23. The International Trade Centre observes that even though the Doha mandate ‘does not confine environmental goods to manufactures’, some Members oppose to include agricultural goods within the negotiations. In contrast, other Members such as African countries have expressed particular interest in including organic products. See International Trade Centre. International Trade Forum Magazine. WTO Negotiations on Environmental Goods: Ensuring a Meaningful Outcome for Developing Countries. http://www.tradeforum.org/WTO-Negotiations-on-Environ mental-Goods-Ensuring-a-Meaningful-Outcome-for-Developing-Countries/#sthash. 9pxTvuE1.dpuf (accessed on 30 January 2014). 24. This, provided that organic products and non-organic products are regarded as ‘like products’ for tariff purposes. See ibid. 25. According to Tothova (2005) considerable uncertainty exists on whether the Doha mandate on EGS ‘covers, or could be interpreted to include, ‘Environmentally Preferable Goods’. In her view, this lack of clarity can be explained by the nature of environmental goods, the lack of consensus on the definition and the use of positive lists identifying goods in trade negotiations (see Tothova, 2005). 26. CSR also takes into consideration environmental issues (see Gonzalez-Perez, 2013a, 2013b). 27. The reader may be already familiar with popular private labelling schemes developed by members of the ISEAL Alliance such as ‘Fairtrade International’, ‘Ethical Biotrade’ and the ‘Forest Stewardship Council’ (FSC). The ISEAL alliance is one of the most important initiatives related to the development of private environmental standards. The ISEAL Alliance is a stakeholder-based organisation that works with governments and other non-state actors, such as companies, non-profit organisations and consumers, in order to support and incentivise the use of voluntary environmental standards in the global marketplace. 28. See Joint UNCTAD/WTO Informal Information Session on Private Standards. The Rise and Implications of Voluntary Private Standards for Access of Developing Countries to Key Export Markets. http://unctad.org/sections/wcmu/ docs/ditc_tedb_ted0010_en.pdf (accessed on January 20 2014). 29. See Annex 3 to the TBT Agreement (Code of Good Practice for the Preparation, Adoption and Application of Standards). According to the WTO, around 200 standardising bodies apply the Code of Good Practice. World Trade Organization. Standards and Safety. http://www.wto.org/english/thewto_e/whatis_ e/tif_e/agrm4_e.htm#TRS (accessed on February 6 2013). 30. It should be noted that the concept of trade barriers and trade distortion is also a matter of extensive debate in law and economics (see Lang, 2011; Vranes, 2009). 31. The issue of governmental intervention in private conduct has been addressed in trade disputes such as Korea
Various Measures on Beef. See Panel Report, Korea
Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/ R, WT/DS169/R, adopted 10 January 2001, as modified by Appellate Body Report WT/DS161/AB/R, WT/DS169/AB/R, DSR 2001:I, 59, paras. 635
636.

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32. Here the term ‘decentralised’ is used as referring to alternative, non-state forms of environmental governance (see Lemos & Agrawal, 2006). 33. GEG is defined as ‘the sum of organizations, policy instruments, financing mechanisms, rules, procedures and norms that regulate the processes of global environmental protection’ (Najam, Papa, & Taiyab, 2006, p. 3). 34. NGOs are among the nine sectors of civil society recognised by the Commission on Sustainable Development (Agenda 21) and in this sense, they play an important role in sustainable development (UN, 2014a). It should be pointed out, nonetheless, that the concept of civil society is subject to debate. GonzalezPerez (2013a, 2013b) notes that the concept is not only broad but also subject to different views (see Gonzalez-Perez, 2013b). 35. While a detailed discussion of the concept of legitimacy is beyond the scope of this chapter, it should be noted that Bernstein (2005) attempts to define legitimacy ‘as the acceptance and justification of shared rule by a community’. In his article about legitimacy in GEG, it is suggested that an analysis about new legitimacy concerns is not without reference to the on-going debate about the reconfiguration of global authority. In this sense, he identifies three main approaches to the definition of legitimacy: (1) principled or democratic conception, (2) legal legitimacy and (3) sociological conception. In his opinion, NSMD governance system address legitimacy concerns both from a principled and sociological perspective (Bernstein, 2005, pp. 142 and 161). 36. UNEP refers to Codes of Good Practice for Assessing the Impacts of Standards Systems and the Verification Code of Good Practice. 37. The observed phenomenon of GAL acknowledges the existence of transnational regulation and administration in which different entities interact. This includes both governmental and non-governmental actors. In this sense, private actors are considered part of the ‘multi-layered character of the administration of global governance’ (Kingsbury et al., 2005). In this contemporary governance narrative (Lang & Scott, 2009) global governance is understood as administration (Kingsbury et al., 2005). The seminal work of Kingsbury et al. (2005) reveals that the perspective offered by GAL can be used in order to analyse different forms of transgovernmental regulation and administration in a context of globalised interdependence. However, it is worth pointing out that this body of law ‘is not at present unified and not yet recognized as a field of scholarship or of practice’ (Kingsbury et al., 2005, p. 15).

ACKNOWLEDGEMENT This research would not have been possible without the support of the Faculty of Law of University College Cork (National University of Ireland) and Universidad EAFIT. The author would like to thank the expert feedback received by Dr. Owen McIntyre of the Faculty of Law at University College Cork.

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ENVIRONMENTAL SUSTAINABILITY IN THE CAFTA-DR REGION: IMPACT OF THE TREATY’S ENVIRONMENTAL PROVISIONS ON COUNTRY AND MULTINATIONAL FIRM LEVEL SUSTAINABILITY Dinorah Frutos-Bencze ABSTRACT Purpose
The chapter examines and describes the impact of the Central American Free Trade Agreement (CAFTA-DR) environmental provisions and the UN Global Compact initiatives on environmental sustainability of member countries at a national level and at a firm level. Methodology/approach
Composite indexes (Human Development Index, Ecological Footprint Index, and Biocapacity) are used to determine CAFTA-DR country level sustainability. Firm level sustainability is

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 147
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based on a qualitative survey of companies using the Global Reporting Initiative framework and UN Global Compact participation. Findings
Based on the methodology used CAFTA-DR member countries cannot be considered environmentally sustainable. Despite the lack of integration between initiatives proposed by different institutions, firm level sustainability trends are positive and encouraging. Research limitations
Free access to Ecological Footprint and Biocapacity scores is limited. The research focused on surveying CAFTA-DR and UN Global Compact sustainability initiatives. However, there are many other entities and institutions not included in this research that also encourage sustainability. Practical implications
The need of a concerted effort to align different organizations and institutions regarding sustainability initiatives in the CAFTA-DR region is apparent. Originality/value
CAFTA-DR includes environmental provisions that are complementary to the UN Global Compact environmental principle. The synergies between these initiatives should be actively explored. Keywords: Environmental sustainability; Global Reporting Initiative (GRI); CAFTA-DR; multinational enterprises (MNEs); UN Global Compact; Environmental Cooperation Program

INTRODUCTION Sustainability has become such a pervasive concept that any discussion about economic development, business strategy, and the environment cannot afford to omit it. However, this was not always the case. It was after the 1972 United Nations Conference on the Human Environment in Stockholm, when the terms environmentally sound development and ecodevelopment began to be used more frequently and entered the economic development and business jargon. Although at the time these concepts were not exactly defined, it was obvious that the type of development implied by the term eco-development was different from the type of development known until then. The strength of the sustainable development concept is that it reflects a change in the vision of how the economic activities of human beings relate to a finite environment. A necessary condition for sustainable development

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is that the regeneration of raw materials and the absorption of waste are kept at ecologically sustainable levels. This shift of thought involves the replacement of the standard economic norms of quantitative expansion such as economic growth with qualitative improvement of societal and environmental norms as the way to move forward (Brundtland, 1987; Daly, 1997; Trzyna, 1995).

CAFTA-DR Background The Central American Free Trade Agreement (CAFTA) between the United States and five Central American countries (Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica) was signed in 2004. In 2006, the Dominican Republic joined the list of member countries and since then the treaty is commonly known as CAFTA-DR. In the literature, this free trade agreement is referenced by several abbreviations including: CAFTA, DR-CAFTA, CAFTA-DR, and US-DR-CAFTA. For consistency purposes, this treaty will be referred to as CAFTA-DR throughout this chapter. The term CAFTA-DR region refers only to the region comprised by the Central American member countries and the Dominican Republic. CAFTA-DR is unique in that it is the first free trade agreement between a large and developed country, the United States, and a group of smaller developing countries. CAFTA-DR provisions require that the majority of goods and services are deregulated. Some of these goods and services in Central America include agricultural products, manufactured products, and other sectors which traditionally state monopolies such as healthcare, electricity, telecommunications, and the financial sector (Hornbeck, 2005a; USTR, 2005). This free trade agreement also provides the United States a chance to pursue other matters of commercial importance such as intellectual property rights, foreign investment, environmental and labor regulations, government procurement, e-commerce, and financial services (Hornbeck, 2005b). Regarding CAFTA-DR’s environmental provisions, the expectation is that the treaty will consolidate and encourage further economic and domestic legislative reforms which in turn will improve the enforcement level in intellectual property rights, labor, and environmental regulations. All CAFTA-DR countries have public institutions responsible for environmental regulations and policies, but do not always have the capacity and the resources to enforce those laws and regulations. However, as investments

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increase and the institutions become more effective, the net impact of these efforts is expected to be positive (Doughman, 2004; Kose & Rebucci, 2005; Walecki, 2007).

CAFTA-DR Specific Environmental Obligations Chapter 17 of the CAFTA states the responsibilities and commitments of each party regarding environmental issues. All signatory countries are required to closely cooperate with enforcement and environmental policy matters. In support of these obligations, the member countries entered into a separate Environmental Cooperation Agreement (ECA) which created the Environmental Cooperation Commission (ECC) composed of government representatives appointed by each member country. The commission is responsible for identifying priorities for cooperative activities and developing a program of work in accordance with those priorities. The ECC also examines and evaluates the cooperative activities under the agreement and recommends ways to improve future cooperation (CAFTA-DR-EC, 2014). In addition, as result of the ECA agreement, the Environmental Affairs Council (EAC), the Secretariat for Environmental Matters (SEM), and the Environmental Cooperation Program (ECP) were created (CAFTA-DRSAA, 2014). Even though each signatory member has the right to establish their own environmental laws and use their discretion in enforcement and compliance issues, they all agreed to make sure that their laws and policies stipulate and support high levels of environmental protection. The importance of maintaining voluntary mechanisms of self-regulation that enhance environmental performance is also recognized and highlighted by the EAC. Finally, the EAC stresses the importance of cooperation in strengthening their capacity to protect the environment and to promote sustainable development while also strengthening trade and investment relations. The major themes of the ECP are the following (CAFTA-DRPrograms, 2013): • • • •

Institutional strengthening Biodiversity and conservation Market-based conservation Private sector environmental performance

This chapter examines and describes the impact of CAFTA-DR’s environmental provisions and UN Global Compact (UNGC) initiatives on

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environmental sustainability of member countries at a national level and at a firm level. The literature review provides a review of the underlying theories about sustainability assessment as well as it describes current environmental sustainability assessment frameworks. Country level sustainability is determined using composite indexes such as the Human Development Index (HDI), Ecological Footprint (EF), and Biocapacity. The use of these composite indexes is complemented by a review of CAFTA-DR initiatives established in each member country. Firm level sustainability is based on a qualitative analysis of companies using the Global Reporting Initiative (GRI) framework as well as UNGC participation.

LITERATURE REVIEW The concept of sustainable development becomes more tangible when divided in smaller components. Most commonly, the three principal components of sustainable development are economic growth, social equity, and environmental protection. These three components are also known as the triple bottom line or TBL (Pope, Annandale, & MorrisonSaunders, 2004). The economic component is based on the principle that the well-being of a society should be maximized while poverty is eliminated through the efficient use of natural resources. The social component is concerned with issues related to the general welfare of society, access to basic health and education services, standards of security, and respect for human rights. The environmental component is concerned with the conservation and enhancement of the physical and biological resources and ecosystems (IUCN, 1980; UNGC, 2013). To find the appropriate balance between the competing demands on natural and social resources without slowing down economic progress has become a daunting task for many governments. Thus, considering only one of the components of sustainable development at a time may lead to errors in judgment and unsustainable outcomes. History has provided many examples of how focusing only on profit margins has led to environmental damages with negative consequences for society. The interconnected and interdependent nature of sustainable development, therefore, requires to think beyond geographical and institutional borders in order to coordinate strategies and make good decisions (Strange & Bayley, 2008).

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Sustainability Assessment There is an ongoing debate about sustainability assessments. However, the consensus about sustainability assessments is that any sound assessment should include the following: • Total integration of economic, environmental, social, and institutional issues. • Careful consideration of short-term and long-term consequences of current actions. • Awareness of the uncertainty of the effects of current actions. • Public engagement (Gasparatos, El-Haram, & Horner, 2007). The challenge of making sustainable development operational is the ability to evaluate and manage at a macro level the complex interrelationships among economic, social, and environmental objectives. At the United Nations Conference on Environment and Development in 1992, documents that outlined a plan and the principles to achieve sustainable development were put forward (Agenda 21, 1993). Furthermore, the UNGC is a strategic policy initiative for businesses that are committed to align their operations and strategies with 10 universally accepted principles in the areas of human rights, labor, environment, and anti-corruption. These documents and initiatives have brought the sustainability concept closer to be an operational guide for assessing sustainability (Dernbach, 1998; UNGC, 2014b). Sustainability assessment is increasingly viewed as an important tool to aid in the widespread shift toward sustainability. However, this is a new and evolving concept and there are few examples of effective sustainability assessment processes implemented so far. Many of the existing assessment frameworks are examples of integrated assessments directly derived from the Strategic Environmental Assessment (SEA) and the Environmental Impact Assessment (EIA) frameworks which incorporate economic, environmental, and social considerations. These integrated assessment processes usually either try to find ways to minimize unsustainability or attempt to achieve TBL objectives (Gasparatos et al., 2007; Gasparatos, El-Haram, & Horner, 2009; Jansen, 2003; Pope et al., 2004; Spangenberg, 2002; Spangenberg, Omann, & Hinterberger, 2002). The major conclusions regarding sustainability assessment frameworks can be summarized as follows: • Sustainability assessment must assess the sustainability of an initiative as well as the final outcome. • Societal goals should be clear.

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In order to measure the progress toward sustainable development, it is necessary to identify operational indicators that provide manageable and accurate information on economic, environmental, and social conditions. Since the early 1990s, many indicators have been developed. The compendium of Sustainable Development Indicators lists more than 500 indicators (Parris & Kates, 2003). A thorough review of the consistency and meaningfulness of many sustainable indicators indicated that the following 11 sustainable development indices are concise and transparent: Ecological Footprint Index (EFI), Human Development Index (HDI), Environmental Sustainability Index (ESI), Environmental Performance Index (EPI), Environmental Vulnerability Index (EVI), Environmental Adjusted Domestic Product (EDP), Living Planet Index (LPI), City Development Index (CDI), WellBeing Index (WI), Index of Sustainable Economic Welfare/Genuine Progress Index (ISEW/GPI), and the Genuine Savings Index (GS). Nonetheless, the study also revealed that some of the above listed indicators do not always comply with fundamental scientific requirements such as the technical aggregation method, normalization and weighting of variables, and the commensurability of input variables (Bo¨hringer & Jochem, 2007; Parris & Kates, 2003). The general conclusion regarding the use of indicators and indices is that they can be powerful tools only if used appropriately. Even though the methods for assessing the consistency and transparency of these indicators are relatively objective, a certain subjective bias remains. Composite indicators may give ambiguous and unreliable information if they are poorly constructed or misinterpreted. The lack of a clear understanding of how the indicators are developed and what information they convey is critical for policy-making decisions using such indicators. The incorrect interpretation of index results may result in flawed policy decisions that could lead to the increase of economic disparities, promote environmental damage, and even decrease the possibilities for long-term sustainability (Golusin & Munitlak Ivanovic, 2009; Mayer, 2008; Siche, Agostinho, Ortega, & Romeiro, 2008; Singh, Murty, Gupta, & Dikshit, 2009). As a standard practice, any policies and development activities ought to be monitored and evaluated to determine whether the policies or activities need adjustments or whether they should be eliminated altogether. In addition, the monitoring and evaluation would facilitate the identification and verification of the appropriate sustainability indicators that should be used for policy decision making. Finally, the monitoring should be continuous to determine both the short-term and the long-term cumulative and synergistic effects.

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Criteria for Environmental Sustainability The World Bank’s definition of environmental sustainability is the starting point of all the existing indicators that measure environmental sustainability as well as the basis of many governmental policies and firm level initiatives (Agenda 21, 1993). The UNGC Principles 7, 8, and 9 specifically refer to the integration of the principles of environmentally sustainable development into business policies and programs to reverse and prevent the loss of environmental resources (UNGC, 2014c). Organizations such as the Organization for Economic Co-operation and Development (OECD), the United Nations Department of Economic and Social Affairs (UNDESA), the World Bank, the Organization of American States (OAS), and many others are also continuously developing measurements and methods to assess programs, projects, and investment strategies based on an environmental sustainability approach. Specific indicators of environmental sustainability are usually used in such methods and assessments. The implementation of any environmental sustainable initiative requires thorough understanding of the initiative as well as the ability to manage renewable resources in the long term. Such initiatives should significantly reduce waste and pollution, use energy and materials effectively and efficiently, and invest in repairing the industrialization damage in many parts of the world. In order to achieve environmental sustainability, enabling conditions such as democracy, continuous human resource development, and investment in human capital are also necessary (Goodland & Daly, 1996; Redwood, Eerikainen, & Tarazona, 2008; Spangenberg, 2002; Stinchcombe & Gibson, 2001; Strange & Bayley, 2008; Ulhoi & Madsen, 1999). The HDI created by The United Nations Development Programme (UNDP) is a composite index commonly used as a proxy metric to measure the progress toward human development goals because the index combines conditions of longevity, health, education, and economic well-being of a population to determine a measure of human development (UNDP, 2010). Since 1980 the UNDP provides a ranking of countries according to their HDI scores on yearly basis. A HDI score of 0.80 is the limit between high and very high human development. In other words, countries with HDI scores of 0.80 or higher are considered to have very high human development. Countries with HDI scores between 0.80 and 0.70 are considered to have high to medium development. One of the criticisms of the HDI is that it does not include an environmental component. Thus, the HDI alone is not sufficient to determine

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environmentally sustainable development. The EFI measures the regenerative capacity of the biosphere used by human activities. A country’s ecological footprint is the total area including infrastructure required to produce everything a population consumes and absorb the waste it generates. On the other hand, Biocapacity measures the productive capacity and the ability of the biosphere to provide biological resources and services for humans. Both the EFI and the Biocapacity are measured in global hectares (footprintnetwork.org, 2014). According to Moran, Wackernagel, Kitzes, Goldfinger, and Boutaud (2008), the comparison of the EFI to Biocapacity is a useful indicator of ecological sustainability. The sustainable development of nations can be examined in terms of two dimensions: the HDI as an indicator of development and the EFI to Biocapacity ratio as an indicator of human demand on the biosphere. In addition, they argued that HDI scores of no less than 0.8 (HDI ≥ 0.8) and an EFI to Biocapacity ratio of less than 1.0 (EF/ Biocapacity ≤ 1.0) is the minimum requirement for environmentally sustainable development that is globally replicable. Moran et al. (2008) used this methodology to survey 93 countries. They found that despite increased global adoption of sustainable development policies only a handful of countries met both minimum requirements. A large body of literature has examined the strengths and shortcomings of the Ecological Footprint approach. Yet despite acknowledged limitations, the EFI is one of the most commonly used biophysical indicators for comparing present aggregate human demand on the biosphere with the Earth’s gross ecological capacity to sustain human life (Chambers, 2001; Kitzes et al., 2009; Monfreda, Wackernagel, & Deumling, 2004). This methodology was used to examine whether CAFTA-DR countries meet the minimum requirements for environmentally sustainable development. At a firm level, a lot of research has been devoted to understand the factors that determine the incidence of sustainability initiatives in different countries as well as the relationship between the firm and its stakeholders regarding sustainability. In the early 1980s, the stakeholder theory in strategic management became popular. One of the implications of the stakeholder theory is that companies must manage their relationships with various stakeholders such as customers, employees, suppliers, shareholders, the community, the environment, and others (Freeman, 2010). More recently, it has been posited that sustainability reporting and corporate social responsibility (CSR) reporting must also take into account key stakeholders (Elijido-Ten, Kloot, & Clarkson, 2010; Nielsen & Thomsen, 2007).

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The effect of stakeholders on CSR and sustainability reporting has been studied extensively, and even though global stakeholder management has not yet fully considered all the issues in the global strategy or stakeholder theory fields, it is worth noting the following trends: Increased CSR and sustainability reporting tend to be strongly associated when the stakeholders are governments and creditors. Also, industries with environmental impact such as the chemical industry tend to affect CSR and sustainability disclosure (Fernandez-Feijoo, Romero, & Ruiz, 2014; Prado-Lorenzo, Gallego-Alvarez, & Garcia-Sanchez, 2009). Other studies have explored the links between regional integration and corporate sustainability at a firm level. For example, Europe was identified as a rather homogenous cultural block in terms of perceiving the activity of multinational enterprises (MNEs). This means that MNEs should shape their strategies based on the entire region, and not on the particular subregional clusters such as Latin Europe and Germanic Europe (Dima & Vasilache, 2013). The links between government policies and corporate sustainability are another area of study. A study found that in California and Scandinavian countries, governmental regulations affect the progress of sustainability initiatives differently. Scandinavian countries tend to be more advanced in their green programs even though policy tools were sometimes more advanced in California (Branum, Cepeda, Howsmon, & Zhuplev, 2013). On the other hand, a plethora of firm level sustainability assessment frameworks and indicators have been developed as well. Currently the GRI framework for measuring sustainability has emerged as the global standard. The GRI is a not-for-profit, network-based organization that enjoys strategic partnerships with, among others, the United Nations Environment Programme and the UNGC (GRI, 2014). The GRI reporting framework outlines the principles and performance indicators that organizations should use to measure and report their economic, environmental, and social performance. A sustainability report based on the GRI framework is expected to provide a relatively accurate picture of the sustainability performance of the reporting organization. The sustainability reports created based on this framework must disclose the outcomes and results that occur within the reporting period which is usually a year. Since different companies and organizations follow the same framework, these reports can be very useful in benchmarking and assessing the sustainability performance of performance standards, norms, codes, laws, and voluntary initiatives. In addition, the organization’s performance can be tracked over time as well as compared with other

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organizations and companies in a similar category. Another advantage of the GRI reporting framework is that it applies to any size company and it is independent of the location and the sector of the company. In other words, small companies can use the framework as well as companies with geographically dispersed operations (GRI, 2014).

METHODOLOGY To determine environmental sustainability at the country level, the methodology proposed by Moran et al. (2008) was followed. The changes in the HDI and EFI to Biocapacity ratio scores for all CAFTA-DR member countries between 2005 and 2008 were calculated. In order to determine the impact of the UNGC and CAFTA-DR on the incidence of sustainability initiatives and reporting at a firm level, a qualitative analysis of GRI sustainability reports and UNGC Participant reports of firms operating in CAFTA-DR was conducted.

Data EFI and Biocapacity scores are not readily available. However, upon request and through a free license at www.footprintnetwork.org, the data for 2005, 2006, 2007, and 2008 were obtained. Complete EFI and Biocapacity time series have to be purchased. HDI scores and country rankings are released to the public each year (UNDP, 2014b). A database of all the companies and GRI filings can be directly obtained from the GRI website (GRI, 2014). The country of origin of the companies, the industrial sector, the size of the company, and links to the sustainability reports are also available. The GRI database lists the country of origin of the companies and the operating region but not the specific countries of operation. A recent study surveyed of 232 MNEs operating in the region determined that firms in the chemical manufacturing sector had the highest incidence of GRI of GRI filing and environmental statement/policy reporting companies, followed by companies in the manufacturing sector and in the advanced manufacturing sector, corporate environmental sustainability initiatives or policies as well as CSR policies (Frutos-Bencze, 2014). This previous study is complemented by a survey of CAFTA-DR domestic enterprises complying with the GRI framework and the UNGC database.

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FINDINGS As described so far, environmental sustainability issues are many and far reaching, and this chapter does not seek to address the entire scope of the subject. However, as economic integration increases, what happens in one country or in an economically integrated region often impacts other countries or economically integrated regions.

CAFTA-DR Country Level Sustainability The EFI to Biocapacity ratios were calculated for each CAFTA-DR member country for the years 2005, a year after CAFTA-DR was signed, and for the year 2008. The HDI scores plotted against the EFI to Biocapacity ratios are shown in Fig. 1. The flat circles represent the 2005 the HDI versus EFI to Biocapacity ratios for each CAFTA-DR country, and the slightly darker spheres represent the HDI versus EFI to Biocapacity ratios for each country for the year 2008. According to the 2008 HDI scores, only Costa Rica was in the category of high human development (score above 0.7). The rest of the countries are in the medium human development HDI versus EFI to Biocapacity Ratios (2005 & 2008) 0.900 0.850 0.800 Costa Rica

Dominican Republic

HDI

0.750 0.700 0.650

Guatemala

0.600 Honduras

0.550

El Salvador

Nicaragua

0.500 0.5

1.0

1.5

2.0

2.5

3.0

EFI to Biocapacity Ratio

Fig. 1.

HDI versus EFI to Biocapacity Ratios.

3.5

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category (0.5
0.7). Fig. 1 shows the increasing HDI trend for all countries from 2005 to 2008. It is worth noting that the most recent HDI rankings indicate that as of 2013 both Costa Rica and the Dominican Republic are in the category of high human development (UNDP, 2014a). The gray area above 0.8 in the HDI scale and below 1.0 in the EFI to Biocapacity ratio scale represents the values a country should have to be considered an environmentally sustainable nation. In other words, the HDI value of the country should be higher than 0.80 and the EFI to Biocapacity ratio value should be between 0.5 and 1.0 (Moran et al., 2008). The EFI to Biocapacity ratio slightly improves for Honduras only. For the Dominican Republic, El Salvador, and Guatemala the ratio increased 0.8, 0.9, and 0.7 points, respectively. Costa Rica’s ratio increased only 0.3 points, whereas Nicaragua’s ratio remained practically the same. The observed trends in Fig. 1 are consistent with Moran et al. (2008) findings which indicate that national and regional trends are almost all moving away from environmentally sustainable development. However, some lower income countries such as Honduras and Nicaragua are experiencing gains in human development without substantially increasing their EFI to Biocapacity ratio. The higher income countries, Costa Rica, Dominican Republic, El Salvador, and Guatemala, exhibit a trend away from environmental sustainability from 2005 to 2008. Generally speaking, the ecological footprint per capita would be reduced if reductions in resource use are achieved either through decreasing consumption or by improving efficiency of production. Even though this methodology cannot be used to determine the specific impact of CAFTA-DRs environmental provisions or UNGC Sustainability initiatives in each country, the analysis is useful in determining national benchmarks and for monitoring these benchmarks over time. Inferences on how specific initiatives are impacting sustainable development based on these results should not be made. However, these findings combined with firm level analysis can provide a more accurate picture of the situation in the region. The following section will look at the landscape of sustainable initiatives at a firm level and how businesses have been affected in the CAFTA-DR region.

CAFTA-DR Sustainability Initiatives As previously mentioned, the ECP is part of a broad effort to advance sustainable economic development in each CAFTA-DR member country. The Market-Based Conservation theme promotes several national sustainability

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Table 1. Sustainability Initiatives under the Market-Based Conservation Theme. Market-Based Conservation Theme Costa Rica Dominican Republic Guatemala

Nicaragua

• Sustainable Cacao Production and Biodiversity Education • Sustainable Agriculture and Forestry Models • Sustainable Palm Leaf Harvesting Techniques Improve Community Incomes • First Sustainable Tourism Marketing Workshop in Guatemala • Sustainable Tourism • Good Practices Promotion and Certification • Sustainable Ocellated Turkey Harvesting • Sustainable Cacao Production and Biodiversity Education

Source: Adapted from CAFTA-DR-Programs (2013).

initiatives to develop ecotourism, agricultural, forest, and fishery production that generate income while conserving natural resources through working with local communities, small businesses, and the government. The impact of these sustainability initiatives at the national level has not yet been measured. However, the methodology presented above may be applied in the future and to get a sense of the impact. Table 1 lists the sustainability initiatives in each country. The Private Sector Environmental Performance theme mainly promotes the use of clean production technologies at a firm level, which should lead to sustainable production and operations; however, specific firm level sustainability initiatives have not been formally established so far. Currently, there’s no apparent direct link between the CAFTA-DR environmental provisions and the initiatives to the UNGC. However, the US Agency for International Development (USAID) is involved in many of the Environmental Cooperation Program initiatives. On the other hand, USAID has collaborated with the UNGC on different projects in Africa and Asia in the past. Thus, it would not be unreasonable to think that the potential of a direct partnership between the UNGC and CAFTA-DR’s Environmental Cooperation Program could become a reality in the future. Firm Level Environmental Sustainability As of mid-2014, there are 13 companies from the CAFTA-DR region that filed GRI reports (nine from Costa Rica, one from El Salvador, and three

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from Honduras). Since the country of origin is a CAFTA-DR member country these companies are considered as domestic enterprises. The domestic enterprises in the sample were classified according to the different sectors used in the GRI database as listed in Table 2. Fig. 2 shows the distribution of the surveyed domestic enterprises based on GRI sustainability report filing. The filings increased significantly from 2004 to 2011, but from 2011 to 2013 the number of filings has stabilized.

Table 2.

Industrial Sectors and Number Domestic Enterprises in the CAFTA-DR Region Sample.

Industrial Sector

Number of Domestic Enterprises Per Sector

Conglomerates Construction materials Financial services Food and beverage products Household and personal products Media Non-profit/services Tobacco Total

1 1 2 4 1 1 2 1 13

GRI Filings of CAFTA-DR Domestic Enterprises 6 5

5

5

5

4

Honduras

3

El Salvador

3

Costa Rica 2 1

Total Filings 1

1

0 2004

Fig. 2.

2006

2010

2011

2012

2013

Percentage of GRI/EP and CSR Reporting Companies by Industrial Sector.

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Since the companies usually provide the year in which a GRI report is filed, it is possible to determine when the company started using the framework. Based on the yearly information, a slow increasing trend of GRI reporting in the sample is observed. This increasing trend of GRI filing in the sample mirrors the worldwide trend.

UN Global Compact Sustainability Initiative The UNGC is the world’s largest corporate citizenship and sustainability initiative. Since its official launch on July 26, 2000, the initiative has grown to more than 10,000 participants, including over 7,000 businesses in 145 countries around the world (UNGC, 2014a). The UNGC launched a Sustainability Coalition with the World Business Council for Sustainable Development (WBCSD) and the GRI. This coalition aims to promote and support corporate commitments and actions that advance the UN goals elaborated in the Post-2015 Business Engagement Architecture report (UNGC, 2013). The very distinct nature of these organizations presents the opportunity for building on complementary strengths and creating synergies: the UNGC being an open action and learning network and the GRI being the recognized global standard on sustainability reporting (UNGC, 2014b). The searchable UNGC participant database provides the name of the organization, the organization type and size, the country of origin, and the year the organization began participation. As of mid-2014, there are 106 participants from the CAFTA-DR region. The breakdown per member country yearly totals and cumulative total are presented in Fig. 3. The UNGC participant classification is slightly different to the GRI reporting categorization. The GRI organization categories are non-profit organization, private company, public institution, state-owned company, and subsidiary. The UNGC participants are classified by organization type as academic, local business association, private company, foundation, local non-governmental organization (NGO), and small and medium enterprise (SME). Private companies and SMEs comprise more than 50% of the participants. It is worth noting that there was a significant increase in participation in 2006 which coincides with the official implementation of CAFTA-DR in all countries except Costa Rica.

163

Environmental Sustainability in the CAFTA-DR Region UN GLobal Compact Participant Trend (2003–2014) 106

100

Costa Rica Dominican Republic

80

El Salvador 60

Guatemala Honduras

40

Nicaragua

27 20

19

2003

Fig. 3.

6

4

1

0

2005

2006

2008

18

10 2010

Yearly Total Cumulative Total

2011

2014

Number of UN Global Compact Participants from the CAFTA-DR Region.

Despite the observed positive trends in the sample, according to the 2013 Accenture-UN Global Compact survey business efforts on sustainability may have reached a plateau. Based on the report, the chemicals industry and the insurance sector were the only two sectors that seemed to have made significant progress in terms of sustainability initiatives. The rest of the sectors (consumer goods, energy, automotive) indicated a growing skepticism in the potential impact of sustainability pressures on industry economics and measures of success (Accenture & UN Global Compact, 2013).

CONCLUDING REMARKS In recent decades, the environmental concerns about the earth have significantly increased and are now one of the most serious challenges that affect the quality of life of people. The whole world is affected by environmental degradation, but it occurs quite often that the least privileged populations and poorest countries are the most afflicted. These countries have the fewest resources available to recover from environmental damage and to adapt to changing situations. By comparing the HDI and EFI to Biocapacity ratios and their changes over time we can capture the changes in environmental sustainability and consumption patterns in each CAFTA-DR country. Based on the calculated values for CAFTA-DR members, from 2005 to 2008, the HDI scores

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increased for all countries and the EFI to Biocapacity ratio also increased, except for Honduras. An increase in HDI scores is desirable, but an increase in the EFI to Biocapacity ratio is not. At a firm level, there is an observable increase of GRI sustainability reporting of domestic firms in the CAFTA-DR region since 2005. Another observable trend is that MNEs are implementing sustainable initiatives locally that mirror global corporate sustainability and environmental policies. This is a positive trend that benefits not only the CAFTA-DR region in general but also domestic firms. With the signing of the treaty, one of the main concerns and arguments against the treaty was that MNEs would not have any environmental considerations and that the environment would be significantly deteriorated as a consequence of their operations in the region. Although based on the results using Moran et al. (2008) methodology, there is a decrease in environmentally sustainable development at the national level, at a firm level, MNEs, domestic enterprises, as well as non-profit organizations are complying with local environmental regulations and are not lowering neither national nor global environmental standards (if they follow such standards) when they establish operations in the CAFTA-DR region. These findings seem to indicate that businesses in general are making progress in embedding sustainability in their operating processes. Some industries, such as textiles and services, might be more constrained by market expectations than the chemicals industry in terms of their ability to quantify and capture the business value of sustainability. The active intervention of governments, policymakers, and institutions such as the United Nations is necessary to move beyond the current plateau and continue to enable businesses to pursue the operationalization of sustainable processes. A closer integration of business and such institutions will help to align public policy with sustainability goals at global, national, and local levels. Simultaneously, businesses should continue to foster innovation and pursue new technologies that mitigate environmental degradation and lead to environmental sustainability. The main research limitation for this chapter was the lack of free access to EFI and Biocapacity data in order to estimate national environmental sustainability for a longer period. In addition, although the research focused on surveying CAFTA-DR and UNGC sustainability initiatives, there are many other entities and institutions that also encourage sustainability which were not included in the sample. The study can be expanded in the future to obtain a more comprehensive understanding of environmental sustainability in the region.

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Recommendations • The research in this chapter suggests that the ability to quantify the value of sustainability initiatives still needs improvement. Businesses are becoming more aware of the challenges of sustainability and how important it is to measure and manage metrics of waste reduction and mitigation and should continue to turn to innovation and technology to solve those challenges. • As described throughout the chapter, there are several sustainability initiatives in the CAFTA-DR region sponsored by different organizations and institutions. Although the environmental chapter of CAFTADR does not solely focus on sustainable initiatives, the provisions expressly call for partnerships and collaborations with organizations with similar purposes and with the governments of each member. Currently, the UNGC and the ECP do not have a partnership. It would be advisable to establish a closer collaboration or a partnership between these entities in the CAFTA-DR region. The UNGC has collaborated with entities such as the USAID in Asia and Africa in the past. Thus, such collaboration could potentially become a reality in the CAFTA-DR region since USAID directly supports the ECP efforts. • Business leaders should strive to establish a constructive, two-way dialogue with consumers and local communities; regulators and policymakers; investors and shareholders; employees and labor unions regarding sustainable development and business practices. In other words, business leaders and managers should actively engage all stakeholders. • Finally, business leaders should revisit their business models and value chains to understand the impact of sustainability initiatives across multiple sectors and industries with a system dynamics mindset. Traditional linear business models encourage increased consumption and more waste; moving toward a system economy can have tangible benefits for production costs, the environment, and the supply chain.

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2016. UN: United Nations Global Compact Office. UNGC. (2014c). The ten principles. Retrieved from http://www.unglobalcompact.org/ AboutTheGC/TheTenPrinciples/index.html. Accessed on August 20, 2014. USTR. (2005). CAFTA-Facts. Office of the United States Trade Representative. Retrieved from http://www.ustr.gov/Trade_Agreements/Regional/CAFTA/Section_Index.html. Accessed on February 19, 2015. Walecki, J. M. (2007). Changing business environments, international trade and regional integration: Who needs CAFTA? Economic Affairs, 27(2), 73
77.

IFRS ADOPTION AND THE ENVIRONMENT: IS AFRICA CLOSING HER EYES TO SOMETHING? Uchenna R. Efobi ABSTRACT Purpose
This study aims at establishing a linkage between IFRS adoption and environmental pollution in Africa. More so, the role of institution was emphasized as a possible ameliorator of environmental pollution in the face of IFRS adoption. Methodology/approach
The empirical model builds on the traditional EKC hypothesis, by including IFRS adoption variable and an interaction term (which captures the multiplicative between IFRS adoption and institutions). Data was gathered for 47 African countries for the period 2001
2013. The SGMM technique was used in the estimation process. Findings
The robust estimation reveals that a positive and significant linkage exist between IFRS adoption and environmental pollution. The interactive variable also shows that the effect of IFRS on the

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 169
195 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017016

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environment will reduce when institutions quality (in the form of bureaucratic corruption) is addressed. Originality
The linkage between IFRS and the environment has not received empirical attention. This is partly due to the fact that accounting phenomenon is rarely linked to macroeconomic outcomes. However, there is a rising interest in the role of accounting institutions on economic outcomes and this study contributes sufficiently to this budding body of knowledge. Keywords: Africa; accounting standards; environmental pollution; financial reporting; international financial reporting standard; foreign direct investment

INTRODUCTION The argument that the adoption of the International Financial Reporting Standards (IFRS henceforth) will improve foreign investment flow to the adopting country is one side to the story. The corresponding environmental concerns that emanate from the inflow of foreign investors are another. Attention has only been focused on the benefit from the adoption of IFRS (Chen, Ding, & Xu, 2014; Gordon, Loeb, & Zhu, 2012) and it remains misleading to “close our eyes” to the attendant consequences on adopting countries; especially those countries with weak institutional framework that are not able to stem these adverse consequences. For instance, in some countries in Europe, carbon taxes are levied on investors whose activities will affect the environment and such institutional framework will curtail the pollution effects from industrial development. Therefore, it is not farfetched to see these countries adopting IFRS in order to further improve their attractiveness to foreign investors (Armstrong, Barth, Jagolinzer, & Riedl, 2008; Guggiola, 2010). African countries are following soothe (adopting IFRS) without considering the effect of the acclaimed inflow of foreign investments on their environment. Against this background, this chapter takes interest in the environmental consequences from the adoption of IFRS in Africa. The recent drive toward the adoption of a common financial reporting language, for better understandability and interpretation of financial information around the world, has witnessed some level of success. Instrumental to this success story is the promulgation of the first International Financial

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Reporting Standard in 2003, following the re-invention of the International Accounting Standard Committee and the subsequent formation of the International Accounting Standard Board. Since then, over 120 countries have adopted the standard based on the premise that it will result to improved foreign capital flow and aid global investment decision (Gordon et al., 2012). This is because the underlining logic behind the unification of global accounting standard is the need for marketplace to translate and determine the actual firm value. The globalization of accounting standards creates the incentives for investors to discover material deficiencies in the management practice and performance of firms and provide an unbiased platform for making informed decision. More so, arbitrage opportunities are drastically reduced with the adoption of IFRS, since the basis for preparing and valuing investment opportunities are universally accented to and information asymmetry
which would have caused undue economic loss
would be reduced. African countries are not left behind in this crave; 14 countries require the standard for all listed companies, 7 countries require IFRS for some companies. Likewise eight countries have permitted IFRS usage and six countries have partially adopted the standard (Deloitte-IAS, 2012). African countries hope to improve the acceptability of their financial reporting structure and attract more foreign investors by adopting IFRS. This, of course, is not disconnected from the persistent “proliferation” of the need for the adoption of IFRS by international multilateral organizations. The World Bank and International Monetary Fund (IMF) are at the forefront of this “campaign.” Nnadi (2012) clearly noted that the World Bank insistently ensured that poor countries (including those in Africa) are considering the compliance with IFRS. Interestingly, the adoption of IFRS has been favored by some regional communities in Africa. For instance, the Economic and Monetary Union of West Africa (UEMOA)1 is planning on implementing and enforcing the IFRS for Small and Medium Enterprises. Likewise, participating countries in the Eastern Central and Southern African Federation of Accountants (ECSAFA)2 have all agreed to adopt IFRSs and the IFRS for SMEs. Considering the broader and acclaimed goal for the adoption of IFRS
that is strengthening the international financial architecture and help to reduce economic and financial vulnerability, and foster market efficiency and discipline that will result to improved global capital mobility (World Bank, 2014)
the adoption of IFRS by African countries is considered a good news. This in no doubt suffices, especially when considering the empirical studies that have iterated the positive association that exist

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between IFRS adoption and FDI in African countries (Efobi, 2014). Efobi specifically stated that indigenous firms can benefit from attracting foreign investors for joint-venture agreement by using IFRS standard for the preparation of their financial report. More so, the adoption of IFRS standard signals a favorable financial reporting environment for foreign investors, who would have hitherto stalled their investment as a result of increased monitoring cost. This is especially higher for countries with poor institutions (like increased corruption) and protection of property rights. In as much as the adoption of IFRS can improve the inflow of FDI into the adopting countries, the consequences of this inflow cannot be overlooked. The most prominent of these consequences is environmental pollution. Majorly, African countries has largely suffered from the activities of multinationals and foreign investors, especially in the area of environmental pollutions (Osabuohien, Efobi, & Gitau, 2013, 2014). Some of these pollutions arises from the type of foreign investors that flow into African countries, which are predominantly resource and market driven. More worrisome is that the institutional framework to check these investors are largely slacked (Asiedu, 2006; Efobi, 2014; Osabuohien et al., 2014). Resultantly, these countries’ environment suffers largely from pollution. For instance, out of the 10 countries identified by the Maplecroft’s Climate Change and Environmental Risk Atlas
2014 version
as countries with the most keenly felt economic impacts of these environmental pollutions, 60 percent of them are from Africa and they include: Guinea-Bissau, Sierra Leone, South Sudan, Nigeria, DR Congo, and Ethiopia. Interestingly, this statistics rates the extent of vulnerability based on three main indexes: exposure to extreme climate-related events such as rising sea level and undulation of temperature, precipitation, and specific humidity; the sensitivity of populations to these events (e.g., health infrastructure, level of education, agricultural dependence, and available physical infrastructure); and the countries’ adaptive capacity to combat the impacts of climate change (e.g., engagement in research and development, income, resource security, and the effectiveness of government). Despite these concerns, African countries’ economies still require substantial flow of finance to boost their resource gap. The 2013 UNCTAD report on strengthening linkages between domestic and foreign investment in Africa clearly noted that foreign investment
in the form of foreign direct investment (FDI)
can play an important role in bridging the wide gap between investment requirements and domestic resource availability. Apart from this substantive reason of the need for FDI, FDI into African countries have been noted to enhance buying/supplying linkages between

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foreign investors and local firms (Amendolagine, Boly, Coniglio, Prota, & Seric, 2013; Merlevede, Schoors, & Spatareanu, 2014); spillover effect of technology, improvement in the extent of innovation, employment generation, and improvement in physical infrastructure (Anyanwu, 2012; Asiedu, 2006; Asiedu & Lien, 2011; Dirk, 2006). In the face of these concerns and the rising agitation for African countries to improve their attractiveness to foreign investment by adopting IFRS, there is the need for the balancing of their environmental regulation to protect their environment from the pollution that comes with foreign investments. However, in doing this, there calls for an empirical validation of this claim
environmental effect of IFRS adoption. As Asiedu (2006) noted, African policy makers usually require empirical findings from Africa to validate the need for a policy action. Further justification of this claim is that the rising vulnerability of African countries (among other developing countries) to environmental concerns is as a result of low research and development (R&D) in the particular area of inquiry. More so, the United Nations Global Compact principles 7
93 require that the environment should be attended to when considering industrial development (Annan, 1999). Currently, the body of knowledge
on IFRS adoption by African countries
records no empirical findings on the environmental implication of IFRS adoption. The difficulty in assessing data on the state of IFRS adoption by African countries cannot be exonerated from this situation and more so, focusing on the environmental implication seems distance from the mainstream accounting enquiries. However, the development of accounting numbers
by the adoption of IFRS
is the current “white spot in dark lining” for African countries in attracting foreign investors and there is the need to underscore the interplay with the environment. The remainder of the chapter is distributed as follows: extensive literature review was included in the section “Issues from Related Literature,” while the section “State of IFRS Adoption in Africa” presents the state of IFRS adoption in Africa. The research method was presented in the section “Research Method” and the empirical analysis was discussed in the section “Empirical Analysis and Discussions.” The study was concluded in the section “Conclusion.”

ISSUES FROM RELATED LITERATURE The body of knowledge that propagates the notion that IFRS adoption will significantly improve the inflow of foreign direct investment into the

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adopting country is nascent. They include conclusions drawn from the study of IFRS and FDI in varying context, using varying dataset. Prominent among them is Chen et al. (2014), who concluded that accounting standards promote foreign investment in OECD4 countries through the medium of reduction in information cost that would have hitherto being heightened by the usage of local standards. Efobi, Nnadi, Odebiyi, and Beecroft (2014) studied the adoption of IFRS by 92 countries
across the world
for the period 2002
2010 and reached similar conclusion that the adoption of IFRS will be able to attract foreign investors only when the institutional framework are improved to support the conduciveness of investment environment. Similarly, Gordon et al. (2012) concluded that IFRS adoption will improve foreign investment and their conclusion was drawn from a global sample of 124 countries. Ramos (2008, 2010) reached a similar conclusion for European Union-EU countries. The reoccurring factor that brings about the increased inflow of foreign investment as a result of IFRS adoption is the improvement in the value of financial information that is consequential to IFRS adoption. Optimist (e.g., Barth, Landsman, & Lang, 2008; Wysocki, 2011) have noted that the universality of accounting standards and the peculiarity of IFRS are able to enhance the value of the financial statement that are produced by firms in the adopting countries. This is because they perceive that IFRS standards promotes better transparency, ensures more disclosure, and enhances comparability of accounting numbers irrespective of the location of the firm. However, proponents of institutional accounting (Chen et al., 2014; Efobi et al., 2014; Wysocki, 2011) renegades that IFRS cannot singlehandedly achieve this objective of attracting foreign investment without recourse to the institutional setting in the adopting country. In the sense of it, institutions (formal) are those guidelines and framework that exists to ensure the regulation of social and economic interactions in a form that provides incentives or constraints for individuals’ actions (e.g., Acemoglu & Johnson, 2005; Efobi, 2014; Glaeser, La Porta, Lopez-De-Silanes, & Shleifer, 2004; Hodgson, 2006; North, 1990, 1991; Osabuohien & Efobi, 2013; Williamson, 2000). Institutions are supposed to act as a monitoring and control mechanism for the application of stipulated guidelines. In essence, institutions are supposed to be a tacit “watchdog” that ensures that economic agents align with stipulated procedure and does not deviate from the expected compliance with such procedures. In terms of IFRS and the economic agents in the adopting country, Efobi (2014) noted that the effective monitoring of economic agents will depend on the efficiency of available institutions.

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It is in this light that this study raises an “alarm” as to the fate of African countries that are adopting IFRS for improved FDI flow. These concerns include the inability of African countries to stem the adverse consequences from the inflow of foreign investment, considering their weak institutional set-ups.5 This is because institutions are supposed to curtail the excesses of foreign investment
such as environmental pollution (Osabuohien et al., 2014). And the consensus in literature have all pointed to the fact that the institutional settings in African countries are low and explains the reasons for the “sluggard” developmental experience of the continent (Asiedu, 2006; Efobi, 2014; Fosu, 2008, 2011; Osabuohien & Efobi, 2013). The situation of low institutional development has diverse consequences. For the focus of this study, we narrow down to a particular cost of economic transaction
pollution
that arises as a result of poor institutional development. Consensus in literature have re-echoed the fact that environmental pollution
which include the depletion of the atmospheric and natural condition of a particular place as a result of the activities of economic agents
has largely been prevalent as a result of the activities of foreign investors (Osabuohien et al., 2013). The main debate that stems from this postulation is the pollution haven hypothesis, which claims that foreign investors are attracted to countries with weak environmental regulations like some developing countries (Cole, Elliott, & Wu, 2008; Dean, Lovely, & Wang, 2009; He, 2006; Kellenberg, 2009). The underlining claim behind the activities of foreign investors and the environment, especially in countries with weak institutional setting, is that richer or developed countries have higher environmental standards that induce innovation and production of environmentally friendly technology (Bhagwati, 2004). This in-turn reduces the environmental damage that can consequently arise from the industrial activities of foreign investors. He (2006) clearly identified this from his dataset on Chinese provinces, where FDI effect depends on the level of economic growth and environmental regulation stringency. This tends to support the “Environmental Kuznets Curve-EKC” hypothesis that at higher levels of economic development, countries tend to experience lower pollution because of income improvement (Stern, 2004). Osabuohien et al. (2014) went further to include the level of institutional development in the traditional EKC model and they consented to the fact that institutional development is a relevant “tool” for stemming rising environmental issues in Africa. It is important to highlight that the literature on FDI and the environment has also tilted toward the summation that FDI presence
sometimes
improves the environmental conditions of host countries.

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Boocock (2002) concludes for Sub-Sahara African countries that FDI introduces new technology and refurbishes existing installations, which makes their presence to be better off for environmental performance. In a later study, Aminu (2005) used 14 developing countries and 11 OECD countries to submit that FDI outflow is positively correlated with environmental policy in 11 OECD countries. Bao, Chen, and Song (2011), using data from 29 Chinese provinces for the period 1992
2004, also settles the fact that FDI in general helps reduce pollution emissions in China, contributing largely to its technique effect. In a more recent study, Osabuohien et al. (2014) reacted by using data for 27 African countries for the period 1996
2010 to prove that FDI flow induces environmental challenges in the form of environmental pollutions.

STATE OF IFRS ADOPTION IN AFRICA To begin this discussion, there is the need to understand the rate of IFRS adoption in Africa and possible explanation for the rising interest in the standard. The International Financial Reporting Standard (IFRS) as released by the International Accounting Standard Board (IASB) has received patronage mostly by European countries; this is following the European Union (EU) regulation
(EC) No 1606/2002 of the European Parliament and of the Council of July 19, 2002
that starting from January 1, 2005, the IFRS would be applied for the consolidated financial reporting of companies listed on the stock exchange of member countries. This, apart from many other argument, has made the IFRS to be tagged “Eurocentric” (Campanari, 2012; Ramanna & Sletten, 2009). This is no wonder why some scholars suspect the sudden rise in interest of most European colonies toward the adoption of IFRS. African countries are no exemption as Nnadi (2012) clearly exposed the rate at which the adoption of IFRS
by African countries
can be linked to their colonial affinity with European countries. Currently, over 30 African countries have adopted the standard in some form. Table A1 in the appendix clearly highlights the countries that have adopted the standard and some additional information supporting the categorization. From the table, some countries like Burundi, Chad, Kenya, Lesotho, Malawi, Morocco, and Uganda publicly declared their legal adoption of the IFRS standards in periods before the EU mandated the compulsory usage of the standard by member countries. Other countries

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either adopted the standard in 2005 or after. Interestingly, most of the countries in this category have colonial linkage to the European Union countries (see Table A2 in the appendix), with British (Botswana, Egypt, Gambia, Ghana, Kenya, Lesotho, Malawi, Mauritius, Nigeria, Sierra Leone, South Africa, Sudan, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe) and French (Algeria, France, Cameroon, Chad, Gabon, Madagascar, and Morocco) colonies being predominant. However, not undermining the influence of colonialism in the rising interest of African countries in IFRS, empirical studies6 have been able to ascertain that the main reason behind countries adoption of IFRS is the need to improve their financial reporting system in order to attract more FDI. Vividly, this argument cannot be confronted, noting that African countries have performed significantly low in the trend of global flow of FDI as reported by the 2014 World Bank’s World Development Indicators. Most of the countries in this region were able to attract less than 5 percent of the global FDI flow. This margin is low compared to countries in East Asia and the Pacific (EAP) and Europe and Central Asia (ECA), which were able to attract more global FDI flow that could peak at about 41 percent (EAP) and 48 percent (ECA) in some periods. The situation of African countries even becomes more worrisome with the understanding that FDI flow was able to contribute to their economy (GDP)
equivalently
the rate for countries in East Asia and Pacific, and Europe and Central Asia, especially when considering the period 2000 and beyond. Since the need for increase in the attractiveness of African countries to global FDI flow involves policy and structural changes
which includes the adoption of IFRS
the critical question remains: are African countries ready for the consequential environmental implication.

RESEARCH METHOD Empirical Model In ascertaining this linkage, the classical environmental Kuznets Curve (EKC) hypothesis is revisited. This hypothesis predicts that the environmental pollution in a particular country can be linked to the changes that occur in the economic income of the country. Put differently, the hypothesis maintains that at early stages of economic growth, environmental pollution increases but after some threshold of economic growth, this trend

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tends to be reversed, such that higher levels of economic growth will eventually lead to environmental improvement (Grossman & Krueger, 1993; Stern, 2004). This improvement is based on the fact that as an economy grows, there is an adoption and adaptation of environmentally friendly productive processes, which mitigates environmental pollution. The latest empirical work of Osabuohien et al. (2014) has tested and applied this hypothesis to African data and has conceded to its reality in explaining environmental pollution in Africa. The basic model that explains the EKC situation is such that: ðE=PÞit = αi þ γ t þ β1 ðGDP=PÞit þ β2 ðGDP=PÞ2it þ ɛit

ð1Þ

The model is explained as emissions per population (E/P), αi and γt being the intercept parameters, which varies across the countries or regions “i” at time “t” identifiers. The remaining variables are the GDP per capita and its squared value, which indicates a non-linear relationship.

Modification of the EKC Model In this study, the EKC model is modified to include the IFRS variable. This inclusion is expected to test the reality of the argument put forward in this chapter that IFRS adoption will likely explain the incremental incidence of pollution in African countries, due to its effect on FDI flow. This purports that a positive relationship is expected between IFRS adoption and environmental pollution. The modified EKC model is presented as: ðE=PÞit = αi þ γ t þ β1 ðGDP=PÞit þ β2 ðGDP=PÞ2it þ β3 IFRS Adoptionit þ ɛit ð2Þ Since the stylized fact presents the scenario that African countries’ environment are likely to be vulnerable due to poor institutional development
in terms of policies on environmental control
and in some cases government’s poor responsiveness to environmental issues,7 the empirical model will test the implication of including an institutional variable in the model. The interactive variable between IFRS adoption and institutional development is introduced such that a negative behavior imply that institutional

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development in the light of IFRS adoption can reduce the vulnerability effect from FDI inflow. This relationship is captured in Eq. (3). ðE=PÞit = αi þ γ t þ β1 ðGDP=PÞit þ β2 ðGDP=PÞ2it þ β3 IFRS Adoptionit þ β4 IFRS Adoption × Institutionit þ ɛ it ð3Þ

Variable Definitions Environmental Pollution was measured using CO2 emission per capita, which is the volume of emission of carbon IV oxide8 per the total population. This form of Green House Gas (GHG) is regarded as the largest contributor to the share of total GHG in the world (World Bank, 2007). More so, this measure has received credence in empirical literature such as Osabuohien and Efobi (2013), Osabuohien et al. (2014). Per capita income is defined as the total gross domestic product in constant 2005 US$ divided by the total population; while IFRS adoption is measured as a count variable where the count begins from the year that the country declares its legal adoption of the standard. It is expected that from that year, the country portrays a favorable business/financial reporting system that will likely be attractive to FDI. Institutions were measured using indicators of the extent of corrupt bureaucratic system. Two indicators9 were applied for robustness and that include the measure from World Governance Indicators (WGI)
control of corruption
and the Transparency International (TI) measure of corruption perception index. These two measures are regarded as the most suitable indicators that capture the extent of bureaucratic malpractices (Glaeser et al., 2004; Rohwer, 2009). The measure of institutions was rescaled such that higher values signify increased corruption. The original scale for the WGI data is −2.5 (worst) to +2.5 (best); while that of TI is from 0 (highly corrupt) to 10 (highly corrupt).

Method of Analysis The System Generalized Method of Moments (SGMM) estimation technique was applied. This technique addresses possible endogeneity problems that plague panel data empirical analyses, like it is in this study. The issue of endogeneity arises from the argument that most variables that identify an economic phenomenon can be explained outside the model. This implies

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that the variables are likely to be correlated with the error term and this event faults the authenticity of the behavior that they assume when estimated. The SGMM technique addresses this issue by using internal instruments and this has been noted to be more efficient than other techniques such as the two stage least square (Asiedu & Lien, 2011; Bandyopadhyay, Sandler, & Younas, 2014; Blundell & Bond, 1998, 2000; Rao, Tamazian, & Kumar, 2010). The only challenge with this technique is confirming the validity of the internal instruments included in the estimation process and ensuring that they are not over-identified. To validate this, the test for autocorrelation [AR (1) and AR (2)] and Sargan test for instrument overidentification becomes relevant. As a rule of thumb, the probability value of the AR (1) test should be ≤ 0.05 and that of the AR (2) be ≥ 0.05; while the probability value for the Sargan test is expected to be ≥ 0.05. More so, the instrument ratio should be above 1, implying that the sample size is more than the total internal instrument applied in the SGMM analysis (Roodman, 2009). The SGMM equation type for Eq. (3) is as follows: ðE=PÞit = αi þ γðE=PÞit-1 þ β1 ðGDP=PÞit þ β2 ðGDP=PÞ2it þ β3 IFRS Adoptionit þ β4 IFRS Adoption × Institutionit þ ηi þ vit⋯t ð4Þ where the other variables are as earlier defined and the lag of the explained variable has “γ” coefficient and “η” is the unobserved country-specific effects and the error term is “v.”

Data Data for this study was sourced for 47 African countries (see Table A2 in the appendix), for the period 2001
2013. The choice of the sample was based on data availability and the period was chosen due to the fact that 2001 was the year the International Accounting Standard Board (body responsible for the release of IFRS) was established and data for other variables were not available beyond 2013. The original sample contained 56 African countries but some countries that do not have data for at least a period of five years were excluded. The data for this study was sourced from the World Bank’s World Development Indicators, World Governance Indicators and the transparency International’s Corruption Perception Index. The IFRS data was sourced from two websites including

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that of the International Accounting Standard Board and the World Bank’s report on standards and codes.

EMPIRICAL ANALYSIS AND DISCUSSIONS To begin the empirical analysis, the summary analysis is presented for the sampled countries. Table 1 presents the mean, standard deviation, and median scores for the total sampled countries, sub-group of those that have adopted IFRS and those that have not yet adopted the standard. It is important to draw our attention to the statistics for environmental pollution, which does not disclose any significant difference between the two sub-groups (countries that have and have not adopted IFRS). This blur is caused by the fact that environmental pollution was based on the total population of the countries. However, when further investigation was conducted, it was discovered that the countries that have adopted IFRS (37,248.63kt) had over 100 percent more of the emission per kilo tonnes compared to those countries that have not adopted the standard (16,922.58kt).

Causality between IFRS Adoption and Environmental Pollution In observing the causality between the variables of interest, the reliability of the estimated outputs was considered by focusing on the probability values of the AR (2) and Sargan test, as presented in the lower segment of Table 2. The values of these tests confirm that the instruments were neither over-identified nor proliferated. Likewise, the instrument ratio resided within the threshold, which further confirms that the results
displayed in Table 2
do not misguide judgment. In columns 1 (A and B) and 2 (A and B), the variables GDP per capita and its squared values follow theoretical expectations, based on the EKC predictions that contemporaneous income level of a country increases environmental pollution but at a threshold, environmental pollution begins to decrease (Osabuohien et al., 2014; Stern, 2003). The statistical significance of the IFRS adoption variable in all the columns where it was presented (columns 3A − 5B) suggests that environmental pollution is a resultant outcome from countries decision toward the adoption of IFRS. As anticipated, a one standard deviation (SD = 2.52)

182

Table 1.

Summary Statistics of Variables of Interest.

Total Mean Environmental pollution (CO2 per capita) GDP Per capita IFRS adoption Institution 1 (corruption) Institution 2 (corruption)

Sample Adopted IFRS

Std. Dev

Median

1.15

2.16

5.31

1615.78 1.48 3.13 40.80

2375.96 2.52 0.54 9.69

7569.32 6.00 3.33 32.50

Mean

Sample Not Yet Adopted IFRS

Std. Dev

Median

1.147

2.055

5.079

1599.594 4.245 2.988 38.871

1952.825 2.558 0.566 10.236

3499.362 7.000 3.495 33.500

Mean

Std. Dev

Median

1.153

2.197

5.311

1624.442 0.000 3.198 42.151

2576.621 0.000 0.513 9.062

7569.320 0.000 3.335 36.000

Note: The square of GDP per capita was not included in this table since it can be computed by squaring the contemporaneous value of GDP per capita. Institution 1 denotes WGI
Control of Corruption, while Institution 2 denotes TI
Corruption Perception Index. The mean value for CO2 emission in kilo tonnes for countries that have adopted IFRS is 37,248.63kt and 16,922.58kt for countries that have not adopted IFRS.

UCHENNA R. EFOBI

Lag CO2 per capita GDP per capita

SGMM Estimation Results.

1A

1B

2A

2B

3A

3B

4A

4B

5A

5B

0.744* (0.000) 0.370* (0.000)

0.751* (0.000) 0.361* (0.000)

0.744* (0.000)

0.751* (0.000)

0.742* (0.000) 0.372* (0.000)

0.747* (0.000) 0.369* (0.000)

0.735* (0.000) 0.394* (0.000)

0.737* (0.000) 0.398* (0.000)

0.657* (0.000) 0.492* (0.000)

0.666* (0.000) 0.475* (0.000)

0.185* (0.000)

0.181* (0.000) 0.009* (0.000)

0.020* (0.000)

0.012* (0.000) 0.091* (0.000)

0.025* (0.000) 0.108* (0.000)

0.018* (0.000)

0.021* (0.000)

0.003* (0.000) −2.999* (0.000) 0.356 0.284 39.000 1.205 No

0.001* (0.000) −2.949* (0.000) 0.571 0.116 46.000 1.022 Yes

GDP per capita2 IFRS adoption Institution 1 (corruption) Institution 2 (corruption) Constant AR (2) Sargan Instrument (I) Instrument ratio (N/I) Time effect

−2.142* (0.000) 0.678 0.201 37.000 1.270 No

−2.032* (0.000) 0.681 0.073 44.000 1.068 Yes

−2.142* (0.000) 0.678 0.201 37.000 1.270 No

−2.032* (0.000) 0.681 0.073 44.000 1.068 Yes

−2.165* (0.000) 0.674 0.239 38.000 1.237 No

−2.082* (0.000) 0.675 0.076 45.000 1.044 Yes

−2.590* (0.000) 0.679 0.310 39.000 1.205 No

−2.593* (0.000) 0.675 0.080 46.000 1.022 Yes

IFRS Adoption and the Environment

Table 2.

Note: The GDP per capita2 was only included in column 2A and B because it was observed that there was no much difference with its contemporaneous behavior. Therefore due to brevity and to avoid undue repetitions, we infer the behavior of the squared value by dividing the contemporaneous value by 2. The variables institution 1 and 2 was not included in the same model/equation because of high multicollinearity that exists between the variables. Respectively, Institution 1 is the measure of corruption by WGI and Institution 2 is corruption by TI. The number of countries (N) is 47, which is the entire sample size for the study. The superscript * implies that the variable is significant at 1 percent level of significance.

183

184

UCHENNA R. EFOBI

increase in the number of years that a country has adopted IFRS induces an increase in environmental pollution of 0.023kt per capita (=2.52 × 0.009). This emission per capita amounts to 37.162 US$ for the average African country, whose GDP per capita is 1615.78 US$. When considering the other columns (columns 3B
5B), the equivalent value for a country with the same per capita GDP, range from 47.15 US$ to 103.80 US$. The equivalent value of the emission per capita was also calculated for countries whose GDP per capita are within the median range of 7569.32 US$, which is 174.094 US$. Given that the interest of African countries are aroused toward the adoption of IFRS, this finding is disturbing; in the sense that the equivalent monetary value of the environmental pollution from IFRS adoption is luxurious for a region battling with poverty and hunger. This result is not in any way discouraging the adoption of IFRS, nor advocating for the entire stoppage of FDI flow that arises from the adoption of IFRS. However, the finding has attempted to provide empirical insight toward the consequent environmental cost from the adoption of IFRS. Clearly, this study advocates for the improvement in the institutional settings of African countries, if they must adopt IFRS. By institutional setting, the control of bureaucratic corruption is brought to fore. This study perceives that multinational corporations will be more environmentally conscious when public officers do not seek for rent from multinationals but rather enforce policies toward environmental sustainability.

Interactive Term To validate this policy recommendation, the interactive variable between IFRS adoption and institution was considered. The main interest is the partial effect of the variable, which shows the implication of IFRS adoption on the environment when taking into consideration the extent of institutional development in the country. The result, as displayed in the columns of Table 3, shows a negative effect. Specifically, the coefficient estimates on the interaction terms indicate that the impact of IFRS adoption on the environment varies inversely with the quality of the country’s institutions. This implies that the consequence of IFRS adoption
that is improved FDI flow
will result to increase environmental pollution in countries with poor institutional settings (i.e., increased bureaucratic corruption) and vice versa. Considering the relative effect of this result for a country with a one standard deviation (SD = 2.52) increase in the number of years of adopting

185

IFRS Adoption and the Environment

Table 3.

SGMM Estimation Results (Including Interactive Variable).

Lag CO2 per capita GDP per capita IFRS adoption Institution 1 (corruption) Institution 1 (corruption) × IFRS adoption

1A

1B

2A

2B

0.725* (0.000) 0.403* (0.000) 0.127* (0.000) 0.123* (0.000) −0.037* (0.000)

0.722* (0.000) 0.411* (0.000) 0.176* (0.000) 0.150* (0.000) −0.048* (0.000)

0.634* (0.000) 0.517* (0.000) 0.171* (0.000)

0.641* (0.000) 0.506* (0.000) 0.176* (0.000)

0.007* (0.000) −0.004* (0.000) −3.319* (0.000) 0.413 0.275 40.000 1.175 No

0.006* (0.000) −0.004* (0.000) −3.292* (0.000) 0.690 0.093 46.000 1.022 Yes

Institution 2 (corruption) Institution 2 (corruption) × IFRS adoption Constant AR (2) Sargan Instrument (I) Instrument ratio (N/I) Time effect

−2.738* (0.000) 0.688 0.373 40.000 1.175 No

−2.792* (0.000) 0.683 0.076 46.000 1.022 Yes

Note: The GDP per capita2 variable was not included for reasons earlier mentioned in the note in Table 2. The variables institution 1 and 2 was not included in the same model/equation because of high multicollinearity that exists between the variables. The number of countries (N) is 47, which is the entire sample size for the study. The superscript * implies that the variable is significant at 1 percent level of significance.

IFRS, there is a reduction in environmental pollution that lies within the range of 0.009 and 0.120kt per capita (=2.52 × 0.009), when the level of corruption reduces. For a country with an average per capita GDP of 1615.78 US$, this amounts reduces between 14.858 US$ and 194.375 US$. This result signals that the improvement in the quality of control of corruption lowers the future environmental treat that is consequential to the adoption of IFRS. This appears to give a bright light to the policy decision to improve the financial reporting environment of African countries. In essence, despite the consequential effect on the environment as a result of the adoption of IFRS, countries can focus on improving their institutions/ lower the prevalence of corruption. As anticipated, the Tables 2 and 3 portray the devastating effect of increased corruption on environmental pollution. This is obvious by the

186

UCHENNA R. EFOBI

positive relationship between the measures of institution and environmental pollution, which was positive in all the columns of the tables. This revalidates the need for the improvement of the institutional environment of African countries in order to check rising environmental pollution.

Robustness It is paramount to check whether the result from the previous estimations is robust to alternative estimation approaches. Initially, the check was conducted for an alternative measure of IFRS adoption, which is using a dummy approach to capture IFRS adoption. This approach has been attractive to some studies like Gordon et al. (2012). In the columns of Table 4, the signs and significance values of the variables, including the interactive variables, remained intact. This suggests that the results
as earlier portrayed
are robust to the measure of IFRS adoption applied in the estimations.

CONCLUSION The key contribution of this study is that it exposes other macroeconomic impact of IFRS adoption and a focus on African sample presents an interesting laboratory for this kind of study. This is based on the rising environmental challenges that confront this region, for which foreign investment cannot be exonerated. Despite this, the main motive for the adoption of IFRS is to attract these foreign investments, leaving the critical question: is Africa closing her eyes to possible environmental challenges that comes with this move? Using a sample of 47 African countries for the period 2001
2013, the study was able to ascertain the relative impact of IFRS adoption on the environment. The main channel through which IFRS adoption affects the environment is through the attractiveness of FDI. Of course, the interactive variable signifies that the development of institutional framework (reduction of corruption) provides a response to this outlook. Explicitly, the finding suggest that the cost implication of emission that results from a one standard deviation from the period of IFRS adoption is between 47.15 US$ to 103.80 US$ for a country with an average GDP per capita of 1615.78 US$. However, when institutions are developed, there is a

Lag CO2 per capita GDP per capita IFRS adoption dummy

SGMM Estimation Results (Including Interactive Variable).

1A

1B

2A

2B

3A

3B

4A

4B

5A

5B

0.743* (0.000) 0.371* (0.000) 0.027* (0.000)

0.749* (0.000) 0.366* (0.000) 0.071* (0.000)

0.735* (0.000) 0.394* (0.000) 0.041* (0.000) 0.093* (0.000)

0.738* (0.000) 0.395* (0.000) 0.094* (0.000) 0.109* (0.000)

0.730* (0.000) 0.398* (0.000) 0.216* (0.000) 0.110* (0.000) −0.058* (0.000)

0.730* (0.000) 0.403* (0.000) 0.363* (0.000) 0.139* (0.000) −0.087* (0.000)

0.658* (0.000) 0.490* (0.000) 0.065* (0.000)

0.667* (0.000) 0.473* (0.000) 0.079* (0.000)

0.643* (0.000) 0.505* (0.000) 0.442* (0.000)

0.653* (0.000) 0.486* (0.000) 0.422* (0.000)

0.003* (0.000)

0.002* (0.000)

−2.998* (0.000) 0.402 0.332 39.000 1.205 No

−2.947* (0.000) 0.814 0.107 46.000 1.022 Yes

0.006* (0.000) −0.009* (0.000) −3.214* (0.000) 0.359 0.270 40.000 1.175 No

0.005* (0.000) −0.008* (0.000) −3.118* (0.000) 0.645 0.105 46.000 1.022 Yes

Institution 1 (corruption) Institution 1 (corruption) × IFRS adoption dummy Institution 2 (corruption) Institution 2 (corruption) × IFRS adoption dummy Constant AR (2) Sargan Instrument (I) Instrument ratio (N/I) Time effect

−2.158* (0.000) 0.660 0.208 38.000 1.237 No

−2.068* (0.000) 0.642 0.078 45.000 1.044 Yes

−2.597* (0.000) 0.657 0.267 39.000 1.205 No

−2.588* (0.000) 0.634 0.078 46.000 1.022 Yes

−2.672* (0.000) 0.690 0.293 40.000 1.175 No

−2.718* (0.000) 0.667 0.100 46.000 1.022 Yes

IFRS Adoption and the Environment

Table 4.

Note: Same as Table 3.

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UCHENNA R. EFOBI

reduction in the cost of environmental pollution within the range of 14.858 US$ and 194.375 US$. The main policy recommendation from this study is that African countries can drastically reduce the incidence of environmental pollution, in the face of IFRS adoption, when bureaucratic corruption is reduced/controlled. In such situations, environmental policies can be applied and the activities of multinationals that affect the environment can be fairly checked.

NOTES 1. This represents Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo. 2. The countries in this association include Angola, Botswana, the Democratic Republic of Congo, Ethiopia, Kenya, Lesotho, Malawi, Mauritius, Namibia, Rwanda, South Africa, Sudan, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe, is also convinced. 3. The principles include: principle 7
businesses should support a precautionary approach to environmental challenges; principle 8
undertake initiatives to promote greater environmental responsibility; and principle 9
encourage the development and diffusion of environmentally friendly technologies. 4. Organisation for Economic Cooperation and Development. 5. See Fosu (2011), Osabuohien and Efobi (2013) and Efobi (2014). 6. For example, Gordon et al. (2012), Chen et al. (2014), Efobi et al. (2014). 7. This is due to rent seeking behavior that causes multinational companies to have their way through corrupt practices, implying that despite the fact that the activities of these multinationals affect the environment, the rent seeking behavior of the government suffices in protecting them against possible charges (Osabuohien et al., 2014). 8. The CO2 emissions emanate from the burning of fossil fuels, the manufacture of cement, consumption of solid, liquid, and gas fuels, and gas flaring. 9. The measure of corruption by WGI ranges from −2.5 (increased corruption) to +2.5 (reduced corruption). As a result of the negative value, this variable was reconstructed by subtracting the variables from 2.5 such that the value is ranged from 0 (reduced corruption) to 5 (increased corruption). The transparency international dataset on corruption was also rescaled so that higher values signify more corruption and vice versa.

ACKNOWLEDGMENTS This chapter is part of a broader research on the economic consequences of IFRS adoption in Africa, which is my PhD focus. Therefore, the funding

IFRS Adoption and the Environment

189

from Covenant University’s School of Postgraduate Studies is hereby acknowledged. The research guidance of Iyoha, F., and Dick, M., of the Department of Accounting, Covenant University, is also acknowledged.

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APPENDIX Table A1. S/N

Country

Rate of IFRS Adoption in Africa.

Year of Adoption/ Adaptation

Comment

The Algerian accounting regulator released the Act 07-11 of 25 in November 2007 to replace the rule of the national accounting plan adopted since 1975. This was aimed at aligning the Algerian accounting plan with the International Financial Reporting Standards (IFRS), with effect since 2009. Accounting standard regulators in Angola started to adopt IFRS in 2009, but not fully adopted yet.

1

Algeria

2007

2

Angola

2009

3 4

Benin Botswana

2008 2007

5

Burundi

2004

6

Cameroon

2009

7

Chad

2003

8

Egypt

2006

9

Gabon

2009

10

Gambia

2007

11

Ghana

2007

In 2007 Botswana announced an official adoption of IFRS, requiring all the companies to prepare their financial reports using IFRS. Accounting standard regulators of the Bank of the Republic of Burundi
BRB (the central bank of Burundi) has adopted and required the usage of IFRS in 2004. Burundi is at stage II of adopting IFRS. Accounting standard regulators in Cameroon are considering adopting IFRS in early 2009 and Cameroon is at stage II in adopting IFRS. Accounting standard regulators of Bank of Central African States (BEAC) is recommended Chad to adopt IFRS in 2003 and Chad is at stage II in adopting IFRS. In 2006, a new set of Egyptian Accounting Standards, based on IFRS which was pursuant to the Decree No. 166/2008 of the Minister of Investment was issued and applied to all listed companies. Gabon has fully adopted IFRS in June of 2009 and Gabon is at stage II in adopting IFRS. Accounting standard regulators in Gambia is making the adoption of IFRS requirements mandatory for Central Bank of the Gambia (CBG) starting 2009. CBG has earlier started adopting IFRS in 2007, but only until 2009 are they making it mandatory. Gambia is at stage II of adopting IFRS. As of 2007 IFRS is required for all listed and unlisted banks, utilities, brokerage, insurance, government-owned businesses. IFRSs will be required for all other unlisted entities starting 2009.

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IFRS Adoption and the Environment

Table A1. S/N

Country

(Continued )

Year of Adoption/ Adaptation

Comment

It was further confirmed that the requirement for adopting IFRS has been legalized for both listed and non-listed companies in the Companies Act in the latest amendment in 2002. Kenya is in the fourth stage of the adoption process. The council of the Lesotho Institute of Accountants voted for the adoption of IFRSs in 2001 and for the adoption of the IFRS for SMEs in 2009, in both cases without any modifications to the standards. Currently Madagascar is in the stage IV of IFRS adoption. The General Accounting Plan 2005 (GAP, 2005) is Madagascar’s current accounting standard. Part of GPA 2005 complies with international standards (IAS, 2003) issued and updated by the committee of IASB. Following a SOCAM (Society of Accountants in Malawi) decision made in 2001, corporate entities of all types and sizes that are listed in the market are preparing financial statements in accordance with the IFRS. However, the SOCAM directive requiring all companies to apply IFRS does not come with prescribed penalties for noncompliance. There is no strict regulation to enforce this directive requirement effectively. Starting from 2005, Mauritian accounting standards regulators required that all listed and non-listed companies in Mauritius adopt IFRS. In May 2004, the Moroccan Stock Exchange Law was established and this required that all listed companies (except banks and financial institutions) on the Casablanca Stock Exchange prepare their financial statements using either IFRS or Moroccan GAAP. When the Bank of Mozambique was permitted to use IFRS, the central bank started preparing their financial statements in compliance with IFRS in 2006 and on March 28, 2007 the Government of the Republic of Mozambique and the Bank of Mozambique officially announced that all banks of Mozambique are required to prepare their financial statements using IFRS. On January 1, 2005, IFRS became required for listed companies under the Namibia Stock Exchange. The government has announced in September 2010 that public listed entities and significant public interest entities are required to adopt IFRS from January 1, 2012.

12

Kenya

2002

13

Lesotho

2001

14

Madagascar

2005

15

Malawi

2001

16

Mauritius

2005

17

Morocco

2004

18

Mozambique

2006

19

Namibia

2005

20

Nigeria

2010

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UCHENNA R. EFOBI

Table A1. S/N

Country

(Continued )

Year of Adoption/ Adaptation

Comment

In 2008, the draft Companies Act (Article 412) mandated registered companies to adopt IFRS. In July 2006, Sierra Leone adopted IFRS as its national standard. Sierra Leone has reached the final stage of adopting IFRS, in which all companies are required to follow IFRS. In February 2004, the Accounting Practices Board took a decision to issue the text of IFRS without any amendments, which made South African Generally Accepted Accounting Principles the exact replica of IFRS. Effective in January 2005, IFRS is required for listed companies. In 2011, IFRS Foundation announced that, Sudan, as one of ECSAFA (Eastern Central and Southern African Federation of Accountants) has agreed to adopt IFRS and IFRS for SMEs. Swaziland is at the second stage of adopting IFRS, in which IFRS is permitted. Tanzania is at Stage IV of adopting IFRS, which is the last stage for IFRS adoption. Listed and non-listed companies are required to use IFRS when preparing for their financial. The National Board of Accountants and Auditors (NBAA) statements adopted wholesale IFRS as the national standards in effect July 1, 2004. Once the Uganda securities exchange limited rules were announced in 2003 all listed companies had to prepare financial statements applicable to national laws and IFRS. They reached the second adoption stage of permitting IFRS. The Zambia Institute of Chartered Accountants (ZICA) permits all corporate entities, including commercial banks and non-bank financial institutions registered and operating in Zambia, to adopt the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) for reporting periods beginning on or after 1 January 2005. Zimbabwe has already adopted IFRSs for all or some companies.

21

Rwanda

2008

22

Sierra Leone

2006

23

South Africa

2005

24

Sudan

2011

25

Swaziland

2009

26

Tanzania

2004

27

Uganda

2003

28

Zambia

2005

29

Zimbabwe

2009

Note: Most of the information in the comment section of this table were gotten from the country analysis by the International Accounting Standard Boards, accessible at http://www.adoptifrs. org/CountryDescription.aspx?CID=238

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IFRS Adoption and the Environment

Table A2. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 a

Some African Countries’ Colonial Linkage.

Country

Colonial

Independence Day

Algeria Angola Benin Botswana Burundi Cameroon Chad Egypt Gabon Gambia Ghana Kenya Lesotho Madagascar Malawi Mauritius Morocco Mozambique Namibia Nigeria Rwanda Sierra Leone South Africaa Sudan Swaziland Tanzania Uganda Zambia Zimbabwe

France Portugal France Britain Belgium France France Britain France Britain Britain Britain Britain France Britain Britain France Portugal South African Mandate Britain Belgium Britain Britain Britain/Egypt Britain Britain Britain Britain Britain

July 5, 1962 November 11, 1975 August 1, 1960 September 30, 1966 July 1, 1962 January 1, 1960 August 11, 1960 February 28, 1922 August 17, 1960 February 18, 1965 March 6, 1957 December 12, 1963 October 4, 1966 June 26, 1960 July 6, 1964 March 12, 1968 March 2, 1956 June 25, 1975 March 21, 1990 October 1, 1960 July 1, 1962 April 27, 1961 December 11, 1931 January 1, 1956 September 6, 1968 April 26, 1964 October 9, 1962 October 24, 1964 April 18, 1980

South Africa witnessed the end of apartheid in 1994.

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INNOVATION-DRIVEN ECONOMIC DEVELOPMENT MODEL: A WAY TO ENABLE COMPETITIVENESS IN NIGERIA Stephen O. Oluwatobi ABSTRACT Purpose
The objective of this chapter is to explain how an innovationdriven economic development model can help to mitigate corruption and facilitate competitiveness in Nigeria. Methodology/approach
With the use of descriptive narratives, Nigeria was examined in comparison with other countries such as South Korea. The chapter argues that Nigeria has not experienced development as much as South Korea because of her primary dependence on crude oil for economic sustenance. Findings
Evidence from the statistics showed that innovation-driven economies are more competitive and less corrupt compared to natural resource-driven economies such as Nigeria. Nigeria has performed poorly in terms of competitiveness, transparency, and governance owing to her

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STEPHEN O. OLUWATOBI

dependence on natural resources as a major means for economic sustenance. Originality/value
Helps to explain why an innovation-driven economic development model is the solution to mitigating corruption and facilitating competitiveness in Nigeria. Keywords: Competitiveness; corruption; innovation; natural resources; Nigeria JEL classifications: D73; N17; N57; O13; O31; O32

INTRODUCTION The definition of economics explains that survival is the objective. Hence, the mission for economic agents has been to meet unlimited wants with scarce means; their striving for survival has inspired efforts that take advantage of limited resources to meet unlimited wants. Such has translated in growth and development in various countries. For some, they have found innovative ways to efficiently and effectively boost their economic performance. For some others, they rely on natural endowments they have discovered. Though the goal of survival may have been achieved in some instances, the challenge of growth and sustainable development is yet to be addressed. This is as a result of the factors associated with the means for economic sustenance. For instance, observations show that economies driven primarily by innovation are more advanced and facilitate competitiveness when compared to economies that depend solely on natural resource endowments for economic sustenance. This is not farfetched as Atkinson (2013) pointed out that uncompetitive economies are usually those that are driven primarily by gains from trading in raw materials with little or no value added. Observations by Gonzalez (2014) asserts that the best performing countries, in terms of competitiveness, are not those dealing in natural endowments for economic sustenance, but rather in innovation and services such as communications, commerce, agricultural business, and exports. According to the World Economic Forum’s (WEF) Global Competitiveness Report, competitiveness is referred to as a “set of institutions, policies and factors that determine the level of productivity of a country.” According to Atkinson (2013), a competitive economy is an economy with controlled incentives to exporters, few import barriers, and the availability of

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trade surplus. Competitiveness according to this study connotes the capability of an economy to export more of value added products than it imports. Hence, it addresses the capacity of an economy, her productivity potentials, and her ability to translate these into results. Economies have therefore pursued productivity for survival and competitiveness and these have categorized nations into underdeveloped, developing, and developed economies. Usually, underdeveloped and developing economies are natural resource-dependent compared to the developed economies. The issue has been that they have not been competitive despite their dependence on natural endowments for economic sustenance. Their contribution has often been making available raw materials for sale, from which they earn income. This has been the basis for their competitiveness, which categorizes them as the least group on the competitiveness ranking (World Economic Forum, 2013). This study therefore argues that the dependence on natural resources as the primary means for economic sustenance impedes the capacity for competitiveness. Rather, it institutionalizes corruption. This study therefore suggests that such economies can neutralize the effect of corruption by establishing frameworks that put innovation as the primary driver of development. Nigeria is the case study. Nigeria is the most populous black nation in the world, ranking the seventh most populous nation in the world (Population Reference Bureau, 2013). The country is Africa’s largest producer of oil and the fourth largest exporter of liquefied natural gas (LNG) in the world (US Energy Information Administration, 2013). Further, the Nigerian economy has amassed huge wealth from oil revenue; yet her economy still looks up to advanced economies for aid. David Cameron reports that Nigeria’s oil export, in 2012, far outweighs the aggregate aid to Sub-Saharan Africa. This is amounting to a hundred billion dollars. So where has all the money gone? This is an indication of corruption, where a rich country is occupied by more of poor people while bulk of the wealth is in the hands of the few elites. The outcome has been political instability, civil unrest, weak institutions, graduate unemployment, and inequality. Some have attributed these to mismanagements, wrong policies, and weak leadership. None of these is wrong. However, this study takes a different perspective by considering how the main driver for economic sustenance affects the level of corruption and competitiveness of an economy. This study argues that the core of these complications is the structure of the Nigerian economy; particularly, crude oil on which the Nigeria economy depends on primarily for economic sustenance given that petroleum export revenue makes up 70 percent of her total export revenue (OPEC, 2013).

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There is tendency for conflicts, unrest, and predation if mainly one source is considered for economic sustenance. This explains the case of the Nigerian economy depending on the oil extracted on the soils of few states. Allowing the economy to operate that way usually is a reflection of weak governance, which tends to political instability and poor institutional framework (OECD, 2005, 2006; Osabuohien, Efobi, & Gitau, 2013; US Institute of Peace, 2010). In such case, only the oil sector and few supporting sectors will be able to create job opportunities, thus, causing the challenge of graduate unemployment, where top skills have little or no opportunities to express their ingenuity. Besides a framework that positions the economy to live primarily on natural endowment, controlled by few elites, programs the people to depend on the central government for everything since other sectors are not developing as much as the natural resource sector (Otaha, 2012). This attention on the oil sector allows only few opportunities, which the elites have the greater advantage of. These have been observed in Nigeria. Since the country is still a factor-driven economy,1 Nigeria is nowhere among the top 100 nations out of 148 countries on the Global Competitiveness report for 2013
2014. Studies such as Shleifer and Vishny (1993), Persson, Tabellini, and Trebbi (2003), Vittal (2004), Mahagaonkar (2008), Anokhin and Schulze (2009), Blackburn and Gonzalo (2009), Krammer (2013), Li (2013) and Ulman (2013), to mention a few, have examined how control of corruption enables innovation, entrepreneurship, competitiveness, and investments for growth and development. However, studies have been scanty as to how promoting innovation in an economy helps to mitigate corruption and facilitate competitiveness. As presented in this study, it is argued that an economy driven by innovation is less corrupt than an economy driven principally by natural endowments as in the case of Nigeria. As posited, the culture of innovation channels attention from depending on the “national cake” to contributing to the “national cake.” This has been proven by results from South Korea. These suggest that the government must be fair enough to adopt a model that will automatically improve the capabilities of the populace, get them involved in the development process, and enable them to profit from it. The remaining sections of this chapter include the following: The section “Literature Review,” which is a review of the literature on the subject. This is followed by the section “Resource-Driven or Innovation-Driven Economy,” which reflects a comparison between a factor-driven economy and an innovation-driven economy. The section “Overview of Competitiveness in Nigeria” is a presentation of stylized facts while the section “Policy

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Implications” is a presentation of the policy implications. The chapter is concluded with the section “Conclusion.”

LITERATURE REVIEW To further establish the idea of this study, the literature is explored on the subject in order to clarify concepts and situate the idea. Economic sustenance is vital to survival. Hence, how the economy is sustained is very crucial. While some economies are factor-driven, some others are innovation-driven. The observation is that the less-innovative economies are less competitive and more prone to corruption and government ineffectiveness as in the case of Nigeria. The argument in this study is that such nation can neutralize the effect of corruption by changing their model of economic sustenance to an innovation-driven economic model. Shleifer and Vishny (1993) in their work addressed two ideas of corruption. The first is the institutional framework and the other is the level to which corruption is legalized as a result of the state of the quality of governance. Their first proposition suggests that the political process and institutional framework are crucial factors that affect corruption. For example, weak governments have weak institutions as well as weak agencies that produce corruption. Such setting discourages firms from operating productively, except for foreign firms looking for countries with weak institutions to take advantage of (Dean, Lovely, & Wang, 2009). With respect to their second proposition, they posit that lack of openness and transparency translates into the need for secrecy and legalized corruption. This is not healthy for the wellbeing of an economy. This explains why the degree of corruption varies in developing economies. Those with lesser degrees of corruption develop faster and better than those with higher degrees. Besides as proved by Ulman (2013), corruption negatively affects the level of competitiveness of an economy. How can the plague of corruption be dealt with then? Vittal (2004), in his presentation of his vision for India, highlighted three things that can be done to choke bureaucratic corruption. First, rules and regulations should be simplified to shrink the scope of corruption. If the rules are simple enough for one to comply with, there would not be need for one to give in to corruption or bribe to avoid compliance. It is observed that in highly corrupt economies, rules and regulations are deliberately made rigid for by-passers of rules to initiate the corruption process so as to enrich corrupt

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officials (Persson et al., 2003). The second thing Vittal (2004) highlighted is transparency of governance
the kind that gives power to the public; and the third is commensurate punishment for corrupt practices. This is crucial because the way of doing things will be shaped by what a system rewards and what it punishes. Goel and Nelson’s (2010) study reveals that there are several other factors that affect the impact of corruption. Their study particularly identified government, historical factors, and geographical factors. They discovered from their cross-country study that the size and scope of government has a significant impact on corruption and so does historical factors. Their findings show that there is a persistence of historical lethargy of institution that induces corruption. On the contrary, geographical factors were found to lessen corruption. Their study also validates that the decentralization of the public sector helps to control corruption. Lalountas, Manolas, and Vavouras (2011) reveal that globalization also affects the effect of corruption, and this effect is usually different across economies. Their findings proved that globalization has a positive effect on the control of corruption only in middle and high income economies. However, there is no significant impact of globalization on the control of corruption in low income economies. This seems not to be farfetched. Globalization usually is in favor of economies that are open, more innovative, and more competitive compared to economies dealing primarily in extracting and trading raw materials. An economy can hardly compete effectively at a global scale in the knowledge economy simply by being factor-driven. Globalization favors the innovative economy and makes them richer compared to factor-driven economies (Lindert & Williamson, 2003). These factor-driven economies are usually low income and corrupt economies with governance void or short of transparency. Despite the general idea that corruption is hazardous, some studies posit that it may not be dangerous in all cases. Blackburn and Gonzalo (2009) provide empirical evidence that it is not all countries with high level of corruption that suffer ill growth performance. According to them, corruption can be less-harmful in some economies than others. After developing a dynamic general equilibrium model, where growth is driven endogenously by putting innovation at the core, they established that corruption effects rely on the degree to which public officials direct their rent-seeking behavior. For instance, it may be institutionalized for innovative firms to bribe public officials to acquire licenses or fast-track operations and escape unnecessary bureaucracies. In this case, organized corruption is leveraged on to allow innovation and its economic impact to thrive. This kind of

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corruption may be considered advantageous; however, not every innovative firm will be able to afford such corruption. Such firm will experience bottlenecks and will be ousted in the game by firms that can afford to bribe the public officials; thus, they may not be competitive. This still makes corruption an impediment to growth and development. On the contrary, the choice to drive growth through innovation affects the choices to be made. For instance, economies that solely depend on natural resource endowments usually have less value for invaluable talents and high skills. Yet these are very vital in innovation-driven economies. This is evidenced by the high level of investments they make in education, training, health care, research and development (R & D), and the culture of enterprise (Maksymenko & Rabanni, 2011). Hence, the choice to drive growth via innovation enables the choice to invest in the quality of people to innovate, create value, create jobs, and incapacitate corruption. But corruption could be an impediment to making such choice. Mahagaonkar (2008) examined the kind of relationship corruption has with innovation
whether it is a lubricant or an impediment to innovation. From his study, it is apparent that corruption has a negative effect on innovation. After employing recent data on firms in Africa using probit and the instrumental variable probit models, his study shows that product and organizational innovation are negatively affected by corruption. Hence, firms in Africa find it difficult to stimulate innovation-driven growth and development. On the other hand, the study shows the positive impact of corruption on marketing innovation. This suggests that firms may not have revolutionary products and models as a result of corruption. However, they can ride on the platform of corruption to intuitively create new markets and drive marketing. Krammer (2013) experienced a direct effect of corruption on innovation but on the basis of a weak institutional environment. After examining the effect of bribes on innovation using firm level data, he posits that bribes are efficient alternatives that enable firms introduce their new products into the market. Since firms are profit-maximizing entities that desire to minimize cost and maximize benefits, it seems ethical to indulge in corruption to minimize the financial responsibilities involved. However, there are issues with this argument. The loophole here is that innovative firms that do not have the capacity to bribe or have values that detest bribe may not sail through to push their innovations to the market. Besides the author agrees that the reason why bribe thrives is that institutional qualities are weak both at the formal and informal levels.

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Anokhin and Schulze (2009) embraced a strategic perspective by exploring how efforts to control corruption can boost trust and reliability in institutions, thus, creating a healthy environment for entrepreneurship and innovation to thrive. After examining this concept using longitudinal data from 64 countries, they validate that building trust, by controlling corruption, facilitates increasing levels of innovation and entrepreneurship. If the state cannot control corruption, there is lack of confidence and trust in the state and the quality of institutions. Hence, firms will have to incur additional cost of transaction and monitoring of activities that have the tendency to impede the potential for trade, productivity, and investment in innovation. This lack of control of corruption disables competitiveness. Emerson (2006) tried to show the conflicting relationship between corruption and competition by presenting a model reflecting the relationship between corrupt government officials and industrial firms. His idea is that government officials have the intention of demanding bribe if they aim to control access to formal markets. Trying to do that will limit the amount of firms that enter into the market; and the fewer the firms in the market, the lesser the competition, the lesser the innovativeness and the lesser the efficiency. Such corrupt practices put power in the hands of a few firm that have corruption capabilities. His exploration shows that where corruption is highest competition is lowest and where corruption is lowest competition is highest. This suggests the inverse relationship between the two. Ngobo and Fouda (2012) had a similar result after they examined the relationship between good governance and competitiveness in terms of firm’s profitability in African economies. Their perspective is based on the fact that wherever there is good governance there is a reduction in uncertainty, search costs, transaction costs, and production costs. This reduction will help to improve firms’ performance and productivity and hence, grant them the leverage to be more competitive. This suggests that the lack of good governance creates an environment that breeds corrupt practices, slows the process of getting results, increases costs and shrinks firms’ capability to add value. After engaging a sample of firms from 21 countries over a period of four years, they found out that an improvement in good governance has a direct effect on firms’ competitiveness. Since the literature confirms the effect corruption has on competitiveness, where does sole dependence on natural resource endowments relate with corruption? Though corruption may be evident in all kinds of economies, countries rich in natural resources such as crude oil, as in the case of Nigeria, have greater tendencies to harbor it as a result of the potential revenue involved. Such can cause impediments on the democratic process

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granting liberty for the misappropriation of public funds, which discourages foreign investments and supports (Li, 2013). Global Witness (2007) reports that, out of the top 10 countries exporting oil to the United States, three of them are ranked as the three most corrupt, according to Transparency International. That report shows that above half of resourcerich and resource-dependent economies are not competitive.

RESOURCE-DRIVEN OR INNOVATION-DRIVEN ECONOMY There is an environment that allows innovation, free enterprise, and the utilization of human potentials at the expense of corruption and there is an environment that permits corruption to thrive and for innovation to be choked. Primary dependence on revenue from oil exports represents one of such. Karl (2005) reveals a 40-years trend of the negative repercussions of oil export dependency to development. The outcome usually has been poverty, poor living standard, poor health care, low life expectancy, corruption, and civil wars. This is not to say that all oil-producing countries are corrupt and suffer from the resource curse. Li (2013) points out that Norway and Botswana have proved this exception. So, the problem is not the oil itself but the manner in which it is responded to with respect to management and development. Hence, where resource curse is evident is where corruption thrives. Corruption only favors few not the majority. This few usually are certain powerful elites, corrupt leaders, and government officials that gain from corruption but lose if the greater good will be considered. For instance, the case of Nigeria shows that petroleum refineries will not be fixed and fixed ones may not be used because few groups of oil firms would lose. Such group usually gains from importing and marketing refined oil within the country. Thus, what does not cost much is portrayed as costly because it is more profitable to corrupt officials to stop operations in the refineries that would create jobs and add value to the economy. Since they have built empires from such platform, they would need to continue to sustain the empires they have built. Thus, every effort to refine oil in Nigeria has been contested (Aborisade, 2014). Government officials are usually bribed to stop the process of development. Creativity, innovation, and the allowance of expression of human potentials are practically impossible in such environment. Selfish motives usually override.

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As long as the Nigerian economy is still natural resource-dependent, corruption may keep thriving and innovation that will reward good efforts may not be given a chance. The control of oil put in the hands of government officials seems to entice them to misappropriate oil revenue. Libya, for instance, had Gadaffi rule for 42 years with conflicts, violence, and amassment of over 200 billion dollars in cash, investments, and gold. Within the same period, Libya suffered poor basic infrastructure, poor education, and poor health care (Li, 2013). So long as the government does not have to depend on majority of the people to contribute to the development process (as in the case of an innovation-driven economy), government leaders and officials may become corrupt since they can control revenue from natural resources without depending on the people. If sustainable growth and development is the motive, it is good for the Nigerian government to make the right choice between the natural resource-driven economic model and innovation-driven economic model to help achieve her growth and development objectives. Since competitiveness is advantageous to an economy, the innovation-driven economy model is more rewarding as corruption, which is bred usually by a natural resourcedependent model, is cancerous to an economy. With an innovation-driven system, government leaders are forced to invest in people, in terms of their education, health, capabilities, as well as in R&D. All these are necessary for innovation to become the norm since it is people that innovate not things. This suggests that this model makes development possible primarily through people. The more the innovative people are available, the more the chances of prosperity. This triggers the need to invest in the capabilities and welfare of people since the wealth and welfare of the economy depends on people. This is the key to competitiveness and control of corruption. On the contrary, in a natural resource-driven economy, there is no motivation to invest in people since such economy does not primarily depend on the ingenuity of people to thrive. The challenge usually is the marginalization of many from the development process and the flow of wealth amongst few elites. Besides the government has no motivation to invest in research and development; neither is there any desire to invest in the people. Why invest in people when revenue flows freely from sales of crude oil? These seem to be the underlying questions for why innovation should not be adopted as the core of development. Hence, basing the economy primarily on revenue from trading in natural endowment seems to be the logical thing to do. However, there are strenuous outcomes. It is more rewarding therefore for Nigeria to change her primary driver of growth and development in order to avoid these disadvantages

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associated with depending primarily on oil export for economic sustenance. Besides these disadvantages, the need for clean energy and the preservation of the planet has fueled efforts to embrace alternative cleaner energy as well as renewable energy. These will shrink the demand for crude oil which will put oil-dependent nations at risk. The United States of America, Nigeria’s largest oil customer, recently pulled out from demanding Nigeria’s oil to consuming their own shale oil (Falade, 2014). The approach to securing the future therefore demands following a path that facilitates competitiveness. And compared to a primarily oil-dependent economy, an innovation-driven economy spurs competitiveness and efficiency. And according to Collaborative Economics (2008), for any economy to compete and survive in the knowledge era, such economy must be a fountain of ideas and innovation must be the primary driver.

OVERVIEW OF COMPETITIVENESS IN NIGERIA The idea in this study is that Nigeria may not enjoy the benefits of competitiveness neither may be free from corruption until the remodeling of the way its economy is being driven. This study argues that an economy driven by innovation outperforms an economy driven by natural resources. Further, it posits that Nigeria can neutralize the effect of corruption and become more competitive globally by embracing innovation as her main driver of growth and development. To buttress these facts, this section presents an overview of Nigeria, in comparison with other economies, with respect to economic performance, innovativeness, competitiveness, and governance. South Korea is one of the economies that the Nigerian economy will be compared with in terms of economic performance over a period of time. Evidence has it that Nigeria and South Korea where at the same level of GDP at the early 1960s. However, with time, the gap began to widen. South Korea made significant upward movement, leaving Nigeria behind. The question to ask is, “What did the two of them do differently?” While South Korea advances, Nigeria still hovers around the same range for 40 years. Fig. 1 is a graphical presentation of the level of GDP of the two countries since 1960. According to the World Bank’s World Development Report of 1998/ 1999, knowledge is the factor responsible for the rise of the South Korean economy above Ghana and other countries like Nigeria. Hence, knowledge is the difference between the developed and the developing. Knowledge in

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Korea, Rep.

12,00,000 10,00,000 8,00,000 6,00,000 4,00,000 2,00,000

19

6 19 0 6 19 2 6 19 4 6 19 6 6 19 8 7 19 0 7 19 2 7 19 4 7 19 6 7 19 8 8 19 0 8 19 2 8 19 4 8 19 6 8 19 8 9 19 0 9 19 2 9 19 4 9 19 6 9 20 8 0 20 0 0 20 2 0 20 4 0 20 6 08 20 1 20 0 12

0

Fig. 1.

GDP (Constant 2005 US$ Millions). Source: Computed from World Bank’s World Development Indicator (2014).

this context refers to the quality of human capital as a result of investment in the people’s capacity to contribute to development. Also it refers to the capacity of the people to utilize their knowledge, skill, and intellectual capital to create and innovate. Evidence shows that these were the focus of investments for South Korea during the 1960s (Alexander, 2003; Lee, 2002; Maksymenko & Rabanni, 2011). What was the Nigerian economy doing in the same period? Nigeria discovered oil in 1956. By the late 1960s and early 1970s, oil production level had reached over 2 million barrels per day from 5,100 barrels per day in 1958 (NNPC, 2010). This massive increase in oil production made oil the main stay of export and driver of the Nigerian economy. Before then, the Nigerian economy depended mainly on exportation of cash crops, such as groundnut, rubber, and cocoa, for economic sustenance. Further, because of the demand for oil as a source of energy, the Nigerian economy was growing but not developing; it was growing but not inclusively. The oil sector and some other related sectors were developing at the extraction phase of production; however, other sectors were not. The manufacturing sector is still crippled as a result of poor infrastructure. Until recently, the service sector was also impeded. But deregulation has helped to open up the sector for development. Thus, massive improvements have taken place in the telecommunication sector and financial sector. Despite these improvements, the economy is still driven by gains from oil wealth, which puts the economy at the risk of fluctuations in oil prices. From Fig. 1, oil discovery and trade in Nigeria did not pay off as much when compared to the South Korean experience. From the early 1970s, their investments in people began to pay off and their growth became exponential.

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Both Nigeria and South Korea invested in education in the period. However, report shows that South Korea placed more value on investment in demand and education because their economy needed highly skilled labor to secure their economic future (Rodrik, 1994). Primary school enrollment in South Korea had increased to 2.2 million in 1960 from 1.4 million in 1945 while Secondary school enrollment increased from 8,000 to 13,000 in the same period (Macit, 2014). As their government invested more in human capital development, enrollment rate at all levels continued to increase. Their outcome shows that investing in people empowers people to be more contributive and valuable to the development process. Hence, people can engage the knowledge gained to create value, innovate, make profits, and position the economy to be more competitive at the global level. This study postulates that the innovation capacity of an economy has a direct impact on the overall state of the economy. Fig. 2 shows the level of innovation from 1985 to 2011 and reflects a similar pattern for the two countries’ economic performance as indicated in Fig. 1.

Nigeria

Korea, Rep.

30,000 25,000 20,000 15,000 10,000 5,000 19 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 11

0

Fig. 2. The Level of Innovation. Source: Computed from World Bank’s World Development Indicator (2014). Notes: The amount of scientific and technical journal articles is used as proxy for innovation (The World Bank, 2008 identified royal payments and receipts, scientific and technical journal articles, and patents granted to nationals as factors that can serve as proxies for innovation since they are R & D oriented and innovation can hardly be quantified. These variables have, thus, been used to capture innovation. However, as a result of the lack of data for countries such as Nigeria, scientific and technical journal articles usually is used as a measure for innovation (Asongu, 2013; Dutz & Dahlman, 2007; Rodriguez, Dahlman, & Salmi, 2008). The argument for such usage, beyond the lack of data of other proxies such as R & D expenditure, is that scientific and technical journal articles help to capture the creation of new ideas and knowledge that transcends innovation in the fields of engineering and information technology).

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The trend from the diagram above shows the pattern of commitment to innovation in Nigeria and South Korea. While both countries started out together at the same level in the 1980s, South Korea developed greatly with an increasing gap. The upward trend in the level of innovation of South Korea signifies the massive level of investments in education before the period, given that high-level skills represent the ground power for innovation to take off. It is observed that the trend in Figs. 1 and 2 are similar for both countries. This indicates two things primarily. First, there is a direct correlation between commitment to innovation and the level of GDP. Second, innovation is more of a driver of growth and development than natural resource endowments. As we can see in Fig. 1, great gains from oil did not still enable Nigeria to catch up with South Korea, instead her trend of GDP was still based on that of innovation. What innovation does is not only to create value that boosts GDP but also to trigger an environment that stimulates the need to develop, engages and optimizes human capital in a way that is effective, efficient, competitive, fair, and void of corruption. This is why it is referred to as the engine for economic growth and development (Tebaldi & Elmslie, 2008). Exploring the Global Competitiveness report for 2013
2014 reveals that economies are categorized into three stages as well as two more, which signify transition from stage one to two and from stage two to three. These three stages are factor-driven economies (stage one), efficiency-driven economies (stage two), and innovation-driven economies (stage three). While Nigeria is in the category of factor-driven economies, South Korea is termed an innovation-driven economy. A factor-driven economy according to the report is one that competes primarily based on natural resources and unskilled labor. While Nigeria ranked 120th out of 148 countries, South Korea ranked 25th. The story of South Korea is a reflection of what Nigeria can be if innovation is considered as a primary driver for development. But how does competitiveness disable corruption? First, I showed some economies that are primarily dependent on oil and how such dependence makes the economies prone to corruption compared to economies less dependent on oil as the primary source for economic sustenance. Table 1 shows the extent of dependence on oil for sustenance, as measured by oil rent as a percentage of GDP. More advanced economies and regions depended less on revenue from oil for economic sustenance compared to Nigeria. For instance, Canada generated revenue from more innovative processes and outcomes in the period 2005
2009 that the gains from oil did not make up to 3 percent of GDP while Nigeria had gains from oil making up over 30 percent in the same period.

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Table 1. Oil Dependence of the Economy. 1980
1984 1985
1989 1990
1994 1995
1999 2000
2004 2005
2009 Arab World UAE Brunei Darussalam Canada Gabon Iran, Islamic Rep. Kuwait Nigeria OECD members Saudi Arabia

38.39681 31.90965 44.8347 3.849314 45.99221 18.14105 55.579 34.50942 1.789351 54.57183

17.07498 17.47213 29.58343 1.279152 26.19079 9.741828 35.14546 32.22069 0.593578 28.39815

21.83323 21.10732 23.14282 1.024663 33.63206 27.03477 32.38728 43.50794 0.379156 36.75542

17.22341 14.37304 16.95505 0.938635 36.32092 19.76271 37.93398 31.44157 0.287605 28.8933

22.61149 15.90725 27.16328 1.57541 42.4616 27.65216 44.03345 32.97574 0.444155 37.02394

32.58265 21.64545 35.20952 2.825539 48.48858 34.58197 54.65524 30.78843 0.735107 50.77383

Source: Selected and sorted from World Bank’s World Development Indicators (2014).

Table 2.

Corruption Perception Index Ranking in 2009.

Country New Zealand Denmark Singapore Canada UAE Botswana Brunei Darussalam South Korea Mauritius Saudi Arabia Kuwait Gabon Nigeria Iran

Rank Out of 180 Countries 1 2 3 8 30 37 39 39 42 63 66 106 130 168

Source: Transparency International (2009).

Depending on oil may not be the concern as much as the effect of depending on oil is the primary means for economic sustenance. From Table 2, it is obvious that economies depending on revenue from oil have more tendencies to accommodate corruption. Given that 1 connotes the least corrupt nation and 180 connotes the most corrupt nation, Nigeria ranked 130 out of 180 countries as assessed by Transparency International

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in 2009. Oil-dependent economies tend to be more corrupt than innovation-driven economies. Such corruption usually is triggered by weak institutions and political instability. Thus, in an economy where there are weak institutions coupled with high level of dependence on natural endowments, corruption usually thrives. Table 3 shows Nigeria, amongst the listed countries, as the most unstable politically with the highest tendency for violence and terrorism through the periods. Such instability has been due to the derivation principle, bunkering of oil by political agents, conflicts in the Niger Delta, terrorism, appropriation of public funds, and politicians driven by personal interests instead of national interest. The derivation principle in Nigeria puts most of the control of oil discovered into the hands of the federal government, not the state or region it is discovered. This distracts politicians from considering better alternative sources that engage the active population to create value, opportunities, and wealth. Rather, it exposes them to deal in corruption. These have translated into ineffectiveness of the government. Table 4 shows the Nigerian government as the most ineffective of the countries listed. Such ineffective governments do not permit environments that support innovation and competitiveness. Rather, they stifle it. Usually such governments cultivate tendencies to impede anything that will serve as an obstacle to having major control of the source of revenue. Table 5 shows that Table 3. Botswana Brunei Darussalam Canada Denmark Gabon Iran, Islamic Rep. Korea, Rep. Kuwait Mauritius New Zealand Nigeria Saudi Arabia UAE

Political Stability and Absence of Violence/Terrorism. 1996
2000

2001
2005

2006
2010

3.417597 3.643357 3.55237 3.882491 2.717277 1.874607 2.9135 2.871194 3.406071 3.747522 1.371956 2.455784 3.342767

3.453441 3.717954 3.451546 3.675676 2.814912 1.687847 2.808483 2.625468 3.502588 3.77163 0.820511 2.27068 3.350297

3.464696 3.725565 3.493247 3.538997 2.723763 1.256102 2.893066 2.932026 3.233053 3.657984 0.488585 2.070861 3.35757

Source: World Governance Indicator (2014). Note: Estimate range from 0 (weakest) to 5 (strongest).

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Table 4. Botswana Brunei Darussalam Canada Denmark Gabon Iran, Islamic Rep. Korea, Rep. Kuwait Mauritius New Zealand Nigeria Saudi Arabia UAE

Government Effectiveness.

1996
2000

2001
2005

2006
2010

2.991596 3.42904 4.434248 4.483126 1.979617 2.010134 3.05572 2.469526 2.893916 4.247905 1.48185 2.263824 3.213092

3.154753 3.079478 4.456644 4.685831 1.871856 1.989847 3.4438 2.60958 3.107788 4.319768 1.545722 2.154758 3.223397

3.02325 3.403641 4.298587 4.735081 1.689025 1.935605 3.632826 2.649316 3.25782 4.230662 1.435778 2.411643 3.430983

Source: World Governance Indicator (2014). Note: Estimate range from 0 (weakest) to 5 (strongest).

Table 5. The Level of Innovation. Botswana Brunei Darussalam Canada Denmark Gabon Iran, Islamic Rep. Korea, Rep. Kuwait Mauritius New Zealand Nigeria Saudi Arabia UAE

1991
1995

1996
2000

2001
2005

2006
2010

22.6 9.1 23842.36 4154.62 13.84 192.7 2407.64 160.06 7.68 2301.46 581.72 693.24 92.24

39.84 15.34 22730.02 4670.04 17.64 551.1 7135.94 240.38 9.3 2773.94 418.06 657.66 144.96

57.9 13.76 23586.88 4947.94 20.3 1777.84 13559.3 236.28 17.42 2840.56 353.9 564.78 187.42

52.86 11.88 28173.35 5324.58 17.28 5264.62 20771.5 228.84 20.84 3233.98 450.44 696.44 248

Source: World Development Indicators (2014). Note: Innovation is measured by the amount of scientific and technical journal articles.

economies depending primarily on oil gains for economic sustenance had low levels of innovation measured by the amount of scientific and technical journal articles. The levels of innovation attained by Canada, Denmark, and South Korea represent an indication that their primary dependence is on innovation.

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Table 6. Tertiary School Enrollment (% Gross). Botswana Brunei Darussalam Canada Denmark Gabon Iran, Islamic Rep. Korea, Rep. Kuwait Mauritius New Zealand Nigeria Saudi Arabia UAE

1995
1999

2000
2004

2005
2009

5.232847 10.90019 74.49031 50.40983 7.24163 17.77297 62.18177 22.4933 7.208773 61.59708 6.08305 18.81098 NA

6.608038 14.82949 58.88373 64.55848 8.370155 20.02786 85.06702 23.22452 15.67123 70.48781 9.747055 24.876 NA

7.35019 18.18375 NA 77.6005 NA 30.24236 99.02424 NA 25.76792 79.85035 10.40504 29.89379 NA

Source: World Development Indicators (2014).

The low level of investment in tertiary education in Nigeria, as shown in Table 6, is a reflection that the government does not consider investments in high skills a priority to become a knowledge-based economy, where innovation is the primary driver to help catch up with more advanced economies. Beyond primary and secondary education, there is need for strategic tertiary education to cultivate high levels of skills that are required to innovate and create value. All these are indications that innovation, as a primary driver for economic growth and development, does not only better improves economic performance but also triggers transparency and involvement of the people in the development process.

POLICY IMPLICATIONS The outcome of this study reveals that developing economies can improve their development and catch up with advanced economies in the development race, if innovation is embraced as the core engine for economic growth. The experience of South Korea has proved that. Policy makers in Nigeria can therefore reframe the structure of the economy in such a way that innovation is made the primary driver. This they can do by putting people at the center of development by investing intensely in human capital. Further, the demographic structure of the economy can be taken

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advantage of by investing in the younger population in order to allow for demographic dividend. Commitment to these will allow for a pool of high skills required for innovation. Besides generating the pool of people possessing the required high-level skills, policy makers also need to create the enabling environment that allows innovation to thrive and enables competitiveness. This suggests that priority be given to the protection of intellectual property rights which will enable innovators benefit from their efforts. This will motivate them to keep innovating. Funding relevant R&D and the facilitation of UniversityIndustry partnerships are also relevant. The continuance of these, with the support of an enabling competitive environment, will inspire the culture of innovation among individuals and firms. This, ultimately, is expected to drive the economy to compete beyond factor inputs and natural resources to competing based on innovation outcomes.

CONCLUSION Nigeria’s dependence on oil for over 50 years has promoted more of corruption than competitiveness for the Nigerian economy. Hence, Nigeria has not been able to compete favorably amongst nations such as South Korea. Though the country has experienced improvements in economic growth, the growth has not been inclusive. This has been reflected by the extent of inequality, graduate unemployment, conflicts and terrorism. This study argues that the Nigerian economy can become less corrupt and more competitive by making innovation the main driver of her economy instead of crude oil exports. With the use of trends and descriptions, it is revealed that Nigeria cannot compete by depending on natural resources for sustenance. This study therefore recommends that innovation be considered as a primary driver. Efforts can therefore be made by the government and the private sector to invest in human capital development and R&D to generate the ground power for exponential growth.

NOTE 1. A factor-driven economy, according to the Global Competitiveness report of 2013
2014, refers to an economy that competes primarily based on natural resources and labor.

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447. Gonzalez, A. (2014, June 10). How smaller businesses can help Africa thrive. World Economic Forum. Retrieved from http://forumblog.org/2014/06/african-smes-success-story/ Karl, T. L. (2005). Understanding the resource curse, covering oil: A reporter’s guide to energy and development. Open Society Institute. Retrieved from http://openoil.net/wp/wpcontent/uploads/2011/12/Chapter-2-readingmaterial Krammer, S. M. (2013). Greasing the wheels of change: The impact of corruption on firms? Innovation in transitory economies. Barcelona: Druid. Lalountas, D., Manolas, G., & Vavouras, I. S. (2011). Corruption, globalization and development: How are these three phenomena related? Journal of Policy Modeling, 33, 636
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GOVERNMENTS AS OWNERS: NATIONALIZATION OF INTERNATIONAL BUSINESS AND SOCIAL RESPONSIBILITY Maria Alejandra Gonzalez-Perez and Santiago Sosa ABSTRACT Purpose
This chapter presents a discussion and an analysis of the literature on nationalization of international business. National governments have justified the expropriation and nationalization of the operations of foreign multinational in their jurisdiction based on the social responsibilities as welfare providers, and safeguarding the short- and long-term interest of their citizens. Methodology/approach
There are multiple studies that show the processes and impacts of nationalizations and privatizations (also called denationalizations) worldwide. This chapter analyses specific cases to the light of existing international business literature and proposes prepositions for future studies. Findings
This chapter presents an analysis where theories of internationalization could be used to analyze specific advantages of States and

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 219
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domestic investors when assuming ownership of operations of international business in their national territory. Originality/value
The context, processes, and consequences of nationalization of foreign firms historically, economically, and politically have generally a correlation either with political changes, and macroeconomic scenarios related to scarcity and uncertainty in the international market of extractive industries, or with nationalistic political views in national governments. Keywords: Nationalization; expropriation; FDI; internationalization; Latin America; corporate social responsibility

INTRODUCTION The end of the 20th century and the beginning of the 21st century have seen a great wave of nationalizations that followed heavy foreign investment in the 1990s, and it has been led by Latin America (Jacobs & Paulson, 2008), portrayed by the expropriation of YPF by the Argentinean government in April
May, 2012. Indeed, many Latin American governments have shifted away from neo-liberal discourses and practices toward policies that greatly support nationalization and protectionism. In particular, the so-called infrastructure industries have been nationalized at a growing speed (Hemphill, 2008). These moves are a return to mid-20th century policies, when, because of Import Substitution Industrialization, public companies in Latin America were conceived as having a vital role in the economic development of the region (Baer, 1996). Nationalization waves are not new. Several industries were nationalized after the Second World War in Latin America, Asia, and Africa, that is, former European colonies (Reed, 2002). This was done in order to rid countries from vestiges of colonialism, like long-term concessions to foreign companies (Jacobs & Paulson, 2008). Moreover, the fact that in the 1980s and 1990s Latin American countries, regardless of their political orientation, adopted neo-liberal reforms including “dramatic privatizations and trade liberalization” (Brooks, 2004, p. 408) after the nationalization wave of the 1970s is evidence that, as argued by Jacobs and Paulson (2008), nationalization processes are part of a privatization-nationalization cycle which is present throughout the world.

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Correspondingly, the 1970s internationally also experienced a sequence of expropriations and nationalizations associated with the peak oil, and the predictions of present and future international scarcity of the resource. However, the amount of cases of expropriations and nationalizations declined in the years after. In 1976, it was published in JIBS a paper by Hawkins, Mintz, and Provissiero (1976) in which there were analyzed 170 cases of takeovers of American firms by foreign governments after the Second World War. It was reported in this chapter that most of these takeovers occurred in Latin America, the vast majority of them were in extractive industries, and almost 50 percent of the cases were associated with crises in leftist governments and nationalistic trends. Schrijver (1997) claims that these series of nationalizations obeys to the desire of developing nations to safeguard fair exploitation provisions regarding natural resources, in a context of domestically and internationally highly demanded raw materials. After presenting this introduction, this chapter will analyze the literature on nationalization of foreign firms. Furthermore, it will discuss corporate social responsibility approaches, while exploring if theoretical frameworks of firm internationalization could be used to explained nationalizations. .

NATIONALIZATION AND PRIVATIZATION There are multiple studies that show the processes and impacts of nationalizations and privatizations (also called denationalizations) worldwide. There are studies of nationalizations in regions, like Latin America (see Murillo, 2002; Murillo & Martı´ nez-Gallardo, 2007) and the Middle East (see Jacobs & Paulson, 2008). Other studies focus on the experiences with nationalization and privatization in specific countries, like Peru (see Champion, 2001), Argentina (see Baer & Montes-Rojas, 2008), and France (Cohen, 2010). Even other studies focus on the specific industry that was nationalized or privatized: the case of bank nationalization in Pakistan (see Akram, Alam, Saleem, Aleem, & Raza, 2011; Shar, Shah, & Jamali, 2010), in Mexico (see Maxfield, 1992), and in India (Ketkar & Ketkar, 1992); the case of pension funds in Argentina (see Kay, 2009); the case of coal in the United Kingdom (see Ackers & Payne, 2002; Haynes, 1953); the case of bauxite in Guyana (see Grant, 1973) and copper in Chile (see Petras, 1973) and in Zambia (see Stoever, 1985); the nationalization of the oil sector in Venezuela (see Bye, 1979; Cho, 2011), in Nigeria (see Genova, 2010),

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in Iran (see Ghasimi, 2011; Qaimmaqami, 1995), in Spain (Shubert, 1980) and the diffusion effect of oil nationalization across several countries or regions (Kobrin, 1985); nationalization of gas in Bolivia (see Haarstad, 2009); and even education in Taiwan (see Mok, 2002). As can be seen, not only governments of the developing world have taken upon nationalizing industries: even some of the world’s most advanced economies, like France and Great Britain, have done it. Nor is it an exclusive phenomenon of the political left: France, dubbed “the nationalization nation” by Cohen (2010), underwent a wave of nationalizations shortly after the Second World War led by right-wing president Charles De Gaulle. The state took control of companies in the energy, transportation (including Air France), and finance sectors, while reorganizing extractive industries. In Great Britain, on the contrary, the nationalization of the coal industry began with a broad coalition of the “Old Left” (Ackers & Payne, 2002) and little or nothing changed with the return of the Conservatives in 1951 (Haynes, 1953). Hence, there are arguments on both sides of the political spectrum to support nationalization (and even within socialism there are different conceptions of nationalization: is it about redistribution or production? See Petras & Morley, 1976). As explained by Beacham (1950), for the socialists nationalization is a matter of principle and they approach the issue with notions of social welfare, whereas for the liberals it’s a matter of expediency and they approach the issue with notions of economic efficiency. The latter have three main arguments to nationalize an enterprise: first, whenever fixed capital costs mean losses, subsidies are required to continue, which bring state control. Thus, state ownership is easier. Second, given that monopolies (as in energy and basic services) require state control, public ownership could be easier as well. Finally, nationalization is preferable whenever private companies are unable to “take sufficiently long views” (Beacham, 1950, p. 552) or when there is a divergence between public (social) and private interests. Three more recent theories, according to Rosa and Pe´rard (2010), explain nationalizations and privatizations. The first is a political theory, which considers ideology as the driver of either process. However, the authors argue, it’s weak because it assumes that decisions are taken irrationally and changes of ideas go unexplained. The second theory is that of efficiency, which leans particularly to privatization because state-owned enterprises (SOEs) are considered inefficient. Finally, the third theory explains privatization by constraints in state budget, that is, privatization serves a state’s financial needs at a given time.

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Regarding the political theory, Pint (1990) argues that nationalization and privatization processes have very definite political goals because governments use these processes to redistribute benefits and costs among several stakeholders and interest groups. Although they may be inefficient economically, such processes can be efficient politically because it reinforces a party’s rule over the country by benefiting its constituencies. In the end, whether nationalization or privatization is successful or not, the author explains, it depends on the viewpoint because economic inefficiency could be part of successful policies aimed at reinforcing government power or staying in power. Regarding the efficiency explanation, Ernesto Crivelli and Klaas Staal (2010) analyze two efficiency arguments: first, state-owned enterprises have lower allocative efficiency because they have a higher risk of overinvestment than private ones because the latter seek only profit maximization, whereas the first seek social welfare, thus investing in risky opportunities that private actors may not take. Second, regarding productive efficiency, governmental support in favor of private firms reduces their efficiency because it cancels either the incentives to employees or their risk of losing their job. Thus, nationalizating an enterprise can decrease productive efficiency (because of the reduction of employee incentives) and allocative efficiency (because of the risk of overinvestment). Reasons for privatizing a state-owned enterprise (SOE) are somewhat similar to those argued for nationalization. According to Toninelli (2008), these reasons can be classified in three types: first, there are political and ideological reasons supporting privatization, but they are the opposite of those supporting nationalization. Second, a state may consider privatizing an SOE because of public finance problems, that is, the state may be in need of more liquidity or even a given amount of money to finance something else. Finally, there are also economic reasons for privatization, which basically refer to SOE inefficiency or politicization. In addition, the author reminds that, in the 1990s, privatization processes were thought of as an economic miracles to make former SOEs efficient and harness social welfare, but a mere change of ownership is not enough for that. So, does nationalization work? Haynes (1953) considers the British nationalization of the coal industry either a mild success or a slight failure because of the few changes, but it would have been worse in private hands for two reasons: one, the attitude of the miners might have been more aggressive, and two, a private owner might not have been willing to invest as much as was needed to reorganize the industry. On the other side of the

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Channel, France’s nationalization was useful for saving companies that were on their way to bankruptcy (like the steel industry), for stimulating both economic growth and the creation of new industries and ensuring the sustainability of sectors such as transportation and energy production (Cohen, 2010). On the contrary, Baer (1996) explains that, in Latin America, state enterprises started to crumble between the 1970s and the 1980s because they were used as macroeconomic policy instruments, their monopoly positions were abused, and their operation was hindered because of political actions. Moreover, the author also argues that income distribution worsened during the period of maximum state intervention in the economy through nationalization and public firms. Thus, the region moved toward a structural reform and privatized many state-owned enterprises, but privatization concentrated wealth in fewer hands than before, thus furthering income distribution imbalances. Neo-liberal reforms were also aimed at attracting foreign direct investment (FDI). However, the renewed wave of nationalization in Latin America has become a danger to FDI inflows. According to Biglaiser and DeRouen, Jr. (2006), it is neither the political regime type nor general economic reforms but the risk of expropriation that is a critical aspect in assessing a country’s attractiveness for investors. Moreover, multinational corporations (MNC) will reinvest their profits in the host country if the expropriation risks are minimal and economic prospects still attractive. In other words, the risk of nationalization can be linked to uncertainty of return of investment, which means profit unpredictability and leads to decreasing interest in investing in a risky country. However, if a company was already operating in a country with expropriation risks, then they could count on their home governments to help them if and when a nationalization occurred. Indeed, the backlashes of both the Mexican and Iranian oil nationalizations prove how powerful companies were: these countries were effectively isolated from the international market. Nevertheless, Moran (1973) explains that, because companies can’t count on their home governments to intervene as they used to, they can adopt three strategies to protect themselves from nationalization: first, they must subject as little capital as possible to the risk (i.e., halt new investments from the parent companies into the risky country). Second, they must gain as many international supporters as possible because they could react to the nationalization in tandem with the companies’ parents. Finally, they must raise the cost of nationalization to the host government to try and dissuade nationalization.

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Indeed, such protection is logical for businesses, as their objectives and interests may be at odds with state’s or society’s. Thus, the question on primacy of interests arises: which come first, corporate or social interests? This question reemerged recently: “Since the beginning of 2008, the privatization movement has dramatically slowed down and the trend has even reversed with the beginning of the financial crisis in September 2008” (Rosa & Pe´rard, 2010, p. 110). An enormous amount of calls for bank nationalization in the United States has been heard since the abovementioned date, even from recognized figures such as Joseph E. Stiglitz (Rasmus, 2009). Moseley (2009) argues that, if the big banks of the United States are too big to fail, then they should be permanently nationalized because government bailout is, in the end, a bailout paid by the taxpayers because of the extreme risks taken by those banks. Opponents of nationalization (even within the White House) argue that it would be a step backwards, that banks only need liquidity to continue operating soundly and that bank management is too complex and too demanding for the government’s capacity. However, the fact that bailouts aren’t working means that liquidity is not the issue. Moreover, “[h]ow could government possibly do any worse than the so-called ‘private experts’ now running the banks into the ground?” (Rasmus, 2009, p. 5). Thus, the debate is open: to what extent is the government responsible for welfare and the pursuit of social objectives, and to what extent are companies? The next section will address the second part of the question by reviewing corporate social responsibility amidst the current nationalization.

CORPORATE SOCIAL RESPONSIBILITY, WHEN GOVERNMENTS ARE OWNERS Tobias Gro¨ssling and Chris Vocht (2007, p. 372) explain that “[t]he history of CSR shows that the popularity of the concept is steadily increasing and that more and more companies adopt it as a tool for building or maintaining their legitimacy in society.” Nevertheless, despite good intentions, corporate actions continue to be amateurish regarding their social responsibility strategies (Jamali & Mirshak, 2007) because CSR is created through an ongoing series of actions and, in particular, through corporate choosing in three levels: principles of the strategy, processes to be undertaken, and results to be expected in line with the principles (Cramer, Jonker, & van der Heijden, 2004).

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According to Garriga and Mele´ (2004), studies on CSR can be classified in four groups of theoretical approaches: first, the instrumental theories, which posit that a company’s goal is only wealth creation; second, the political theories, which focus on corporations’ power, regarding both societies and political arenas; third, the integrative theories, which consider corporations as focused on satisfying social demands; and fourth, ethical or value theories, which focus on companies’ responsibility to the societies they operate in. Likewise, Godfrey and Hatch (2007) argue that there are two major disciplines that frame the academic discussion about CSR: economics and moral philosophy. Theories of CSR are located somewhere along the continuum between the two extremes, either considering them as opposite or as complementary. Regarding corporate activity itself, Husted and Allen (2006) conclude that MNCs have two broad choices regarding the pursuit of a CSR strategy because, as any other strategy to be implemented, deploying a company’s resources follows the assessment of needs and projections of outcomes. Thus, a company can either manage issues bearing in mind a case-by-case analysis, that is, assessing each local and global issues and implementing a tailored strategy for each or implement a one-size-fits-all CSR strategy globally and, by doing so, accepting the risks of misfits. Additionally, a company’s own concept of its social role and responsibilities affects its reputation and enable it to better deal with social demands (Gro¨ssling & Vocht, 2007). However, Striker, Gao, and Bansal (2006) explain that social responsibilities of MNCs are part of the debate regarding welfare creation as argued by neo-liberal trade philosophy. Neoliberals posit that free trade generates economic gains that, in turn, facilitate the creation and improvement of social welfare, whereas the opponents of this view argue that the abovementioned philosophy actually goes against social justice and is a threat to the environment. Indeed, [w]here the CSR agenda is particularly problematic, however, relates not only to limits regarding the scale, scope and quality of CSR interventions and institutions, but the fact that it is part and parcel of a broader “reform” agenda that promotes both market liberalisation and self-regulation, often at the cost of labour rights, decent wages, employment security, corporate social welfare, universal social provisioning, and both state and trade union regulatory capacity. (Utting, 2007, p. 709)

Thus, “firms can be simultaneously socially responsible and socially irresponsible” (Striker et al., 2006, p. 850). Nevertheless, in her studies, Siltaoja (2006, p. 108) has found that “a good business policy with an ethical reference has more influence on reputation than separate, external responsibilities within CSR. It is, of course, worth noting that CSR and

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corporate reputation are constructions that vary in time as well as in place” because, indeed, the construction of a company’s reputation is a process dependent on the perception of key stakeholders. Moreover, and because of the above, a company can have several reputations. But where do we draw the line drawn between CSR and state responsibilities? Dima Jamali and Ramez Mirshak (2007) argue that improving the welfare of the population in developing countries is unlikely to happen without the participation of the private sector through responsible business activities. In addition, Michael Blowfield (2005) explains that the conception of CSR has, of lately, changed from the simple amelioration of the negative consequences of FDI (particularly focused in environmental protection) to a way to further FDI. Thus, CSR has become linked not only with sustainability but also with international development. On the other hand, Newell and Frynas (2007) argue that the fact that some local communities resort to special strategies to hold companies accountable to their actions and promises is evidence that both corporate responsiveness and state support are lacking or even nonexistent in several contexts. Thus, people have to take matters into their own hands to prevent corporate irresponsibility. In addition, [n]owhere in the developing world is there any clear example of [resource extraction industries (REIs)] providing an effective spur to development […] Typically [REIs] have operated in ways
often morally questionable ways
that were clearly designed to frustrate the development plans of developing countries. (Reed, 2002, p. 209)

It thus seems that the question of development and welfare
whether the state or the company is responsible
is quite complex. This chapter will contribute to the growing literature on the subject by analyzing the most recent nationalization wave in light of CSR in order to assess the public and private sectors’ role in the creation of welfare. By evaluating the social and economic changes caused by the recent nationalization processes in Latin America, it will be possible to conclude whether or not SOEs do actually create more welfare than the CSR strategies of the private sector companies.

NATIONALIZATIONS AND INTERNATIONALIZATION SPECIFIC ADVANTAGES OF STATES AND DOMESTIC INVESTORS Classical theory of trade (Ricardo, 1817; Smith, 1776) explains that foreign direct investment and international trade are the result of the combination

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of specialization and trade related to the difference in the cost of production of goods between two countries. For this theory, benefits of FDI and international trade to a particular country are determined if international trade has absolute cost advantages over other. On another hand, Hymer (1960) assumes that a firm will establish foreign operations only if they have strong, specific, and monopolistic advantages created and developed at home to overcome the liability of foreigners. Along the same lines, Kindleberger (1969) state that in order to be competitive, foreign operations of a firm must be capable to obtain higher returns than a local firm. This implies an analysis of FDI at the firm level. For this, a firm must have a differentiated product, higher marketing skills, availability of exclusive technology, and to ensure concessions by governments. Dunning (1980)s eclectic approach (OLI paradigm) proposes that firms internationalization modes are interlinked based on ownership, locational, and internalization advantages. This could be potentially used as a framework for analyzing government decisions to nationalize the operations of foreign companies in their national jurisdiction as it will be explained below. If a government has specific OLI and monopolistic advantages for taking over the operations of a multinational company which might allow it bypassing external markets, establishing a market position, gaining special access to inputs and markets, and still remind attractive to foreign and national investors due to its operation efficiency and competitiveness, it could be potentially prospective a nationalization.

FINAL COMMENTS AND RECOMMENDATIONS FOR FURTHER STUDIES In the cases presented in the previous section, the following prepositions could be proposed to be tested in future studies. It could be observed a perception by governments that foreign firms have their advantage mostly related to the concessions given by them. This might be in conjunction with the perceived capacity of a State of managing by itself or by national investors’ current operations of foreign companies in their jurisdiction. This might be associated with observations of having locally absorbed technology, managerial skills and product innovation capacity from multinational companies, to be able of successfully managing local operations and

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domestic and international markets with sustainable level of competitiveness, and overcoming product life cycle limitations. Furthermore, there might be perceived opportunities and evidences of increasing benefits for local companies and citizens at the short and long term. In the specific case of companies in extractive industries, this also might be associated with the assumed responsibility of governments of safeguarding the availability to raw material and energy sources for their countries.

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PUBLIC MANAGEMENT AND SMART MOBS DESPITE THE 2014 FIFA WORLD CUP IN BRAZIL: REFLECTIONS ON THE CONTEMPORARY ORGANIZATIONAL MODEL IN COMPARISON WITH THE UN GLOBAL COMPACT INITIATIVE Carlos Ota´vio de Almeida Afonso and Ricardo Vinhaes Maluf Cavalcante ABSTRACT Purpose
The aim of this chapter is to promote a reflection on how the smart mobs are established, despite the 2014 FIFA World Cup in Brazil, that took place in Brazil from June 12 to July 13, 2014, in comparison with the organizational model of the contemporary Brazilian public management, emphasizing that, in spite of “major reforms” carried out

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 233
251 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017019

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and of the progressive speeches, the focus continues to be the way to control the resources and the people, including the construction of Infrastructure for 2014 FIFA World Cup in Brazil, especially based on Principle 10 (Anti-Corruption) of UN Global Compact initiative. Methodology/approach
This chapter draws both on primary and secondary qualitative data, especially the literature of smart mobs, as well as public management models in Brazil, mainly based on Guerreiro Ramos, which constitutes the theoretical framework for the analysis, as well as “deep interviews” with citizens, which was protesting against the FIFA World Cup, that was analyzed through an interpretative approach, the phenomenography, based mainly on “International business, corruption and bribery” topic to develop a cross line framework. Findings
The chapter provides an analytical framework to reinforce the growing practice of social control that can improve the public management model in Brazil through the development of the societal administration (substantive rationality); presenting that to the extent that the Brazilian government organizational model was not intended to “interact” with society, it has contributed to generate an unsatisfied demand for democracy in Brazilian citizens, whom support the United Nations Global Compact initiative and do not support the current model of the Executive Branch. Practical implications
Given the recent smart mobs in Brazil and the lack of clear analytical axes for the orientation of research in organizational studies regarding the Brazilian public administration, as well as fragmentation in their respective academic production, it is hoped that these theoretical reflections and empirical results can contribute to promote academic progress for the Public Management in Brazil, as well as for the Corporate Citizenship all over the world. Originality/value
The chapter introduces a general reflection on the relations between these study objects, in order to foster new research. It is expected that this work will help to increase the debate about the importance of the Brazilian public management, in particular, but the international public administration too (mainly the United Nations [UN] members states), to include substantive rationality for managers, so they can better understand and respond more effectively to the needs of citizens, companies, and organizations. Keywords: Smart mobs; public management models; objective possibility; Brazilian public administration; UN Global Compact

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INTRODUCTION The popular manifestations that happened in Brazil in June 2013, in parallel with the realization of the FIFA Confederations Cup, started questioning the increase of the bus fare, but the surge of repression from the Brazilian State towards the civil protesters led to a wider reaction to include some problems that were outraging the Brazilian citizens, afterwards one million Brazilians took the streets of the country’s main cities (smart mobs) to protest against government corruption, on June 20, 2013. Indeed, there were recent smart mobs in Brazil despite the 2014 FIFA World Cup
that took place in Brazil from June 12 to July 13, 2014
mainly organized through the Facebook social network, to protest against government corruption, based mainly on the construction of Infrastructure for 2014 FIFA World Cup in Brazil, what sounds with Principle 10 (AntiCorruption) of United Nations (UN) Global Compact initiative, especially on “International business, corruption and bribery” topic. Regardless of corruption, accountability of the Public Prosecutor’s Office (Brazil), Brazilian Federal Court of Accounts and Courts of Justice (Brazil), is there any kind of relation between the organizational models of the Brazilian public administration, especially the Executive Branch, with these facts? The studies that analyze the public management models in Brazil, in general, point three predominant organizational models: patrimonialism; bureaucracy; and the new public management (Managerialism). More recently, there is an emerging organizational model called public governance (also called social management in Brazil). The professor-researcher Paes De Paula (2005a) points to the lack of analytical axes defined to the orientation of the research in organizational studies in the Brazilian public administration field, as well as the fragmentation of their respective theoretical production, while the most critical elements in the study of the State, government, and public policy are the theoretical and methodological issues. In order to contribute to the decrease of this fragmentation and to the progress of the organizational studies, in particular in the thematic analysis of the public management model in Brazil, and considering the recent popular manifestations, this chapter establishes a general reflection on the relations between these study objects, in order to foster new researches. Therefore, the aim of this chapter is to promote a reflection on how the smart mobs are established, despite the 2014 FIFA World Cup in Brazil, in comparison with the organizational model of the contemporary Brazilian

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public management and with Principle 10 (Anti-Corruption) of UN Global Compact initiative, emphasizing that, in spite of “major reforms” carried out and of the speeches as well as the search for the economic viability, efficiency, efficacy, and effectiveness, the focus continues to be the way to control the resources and the people who somehow have to manage the “public good” (res publica), including the construction of Infrastructure for 2014 FIFA World Cup in Brazil. This work is structured in five parts: this introduction; the theoretical framework; the approach; findings; and the final remarks.

THEORETICAL FRAMEWORK Smart Mobs In his text Technologies of cooperation, that is part of the work “Smart Mobs,” Rheingold (2002) searches for indications of social forces that have worked in the middle of a smart mob. He defends that the social networks participants can put a little of their knowledge and impressions online and get more knowledge and opportunities for socialization than what they have invested; that is cooperation, collaboration, and exchange. Smith (apud Rheingold, 2002) has defined that a public good is a feature that everyone can benefit from without having necessarily participated in its creation, such as the squares, parks, sanitation systems, a lighthouse built by few, but useful to everybody, and even the public television. A public good can be defined as a place where the consumption of a part does not reduce the availability of the good for consumption by others. Those who consume the public goods without contributing in any way, or that super consume without caring about leaving anything to the other, are called free-riders. Smart mobs can contain the herds of free-riders. They endanger the cooperation to the extent that its reputation is hampered by the mistrust of others to take part in a collective action, which end up not participating to prevent themselves against fraudsters. At this point, we can start the analysis of the popular manifestations that happened in Brazil in June 2013, in parallel with the realization of the FIFA Confederations Cup. They started questioning the increase of the bus fare, but the surge of repression from the Brazilian State towards the civil protesters led to a wider reaction to include some problems that were outraging the Brazilian citizens.

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Including violent demonstrations, vandalism and damage to public buildings such as State offices and municipal governments, their greatest act was the occupation of the Ministries Esplanade (Monumental Axis) in the federal capital, Brası´ lia, with the attempted invasion of the National Congress of Brazil and almost invasion of the Itamaraty Palace, the Ministry of External Relations headquarters
which had its entry into flames after the free-riders glowing cones with fire, garbage and throwing molotov cocktails. The most exciting of this all is that a vast majority of the protesters do not support these vandalism acts or the political parties militants “piggybacking,” and attempts to dissuade free-riders to not make them, in order to maintain only the peaceful manifestations, which are declared nonpartisan. But the problem we have here is what the peaceful majority may not know: it is almost impossible the elimination of the smaller subgroups of free-riders in large crowds. Investigations points to a trend in smaller groups to be “independent” of the crowd and simply use it to implement its objectives, which can be
because they often are
different from the majority of the other groups that are in the crowd, as we shall see below. In his work, Rheingold (2002) resumed the article “The Tragedy of the Commons,” by Garret Hardin
published in the journal Science in 1968
who says that ruin is the fate man has, each looking for his interest in the middle of a society that believes in the freedom of the communities: “The freedom of the communities leads everyone to the ruin.” Each one succumbs to the temptation to take more and more of the common good, which ends up disappearing. This made Rheingold recover an old debate that continues until today around the following question: against the temptation of the selfishness, how do men come to cooperate? Must they limit their freedom in an authoritarian fashion? To provide continuity, Rheingold (2002) relies on Thomas Hobbes and John Locke, claiming that the debate about the tragedy of Hardin is, in fact, a modern version of a more ancient philosophical conflict: “In 1660, Thomas Hobbes argued that men was so competitive that the only way to make them cooperate was if someone very powerful could impose a truce, Hobbes points out this coercive authority like Leviathan.” In counterpoint, John Locke replied that “human beings can govern itself from the social contracts, instead of submitting to a coercive authority.” In 1982, Olson (apud Rheingold, 2002) said that the cooperation will occur only in the case of very small groups or if there is some of the requirements or another outer element that compel people to work in a group; because, according to him, the rational subjects never struggle to

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find a common interest or of a group, but, in spite of this, Olson gives some evidence that some groups are acting together to produce common property or avoid an consumption excess, explaining that the reputation is a recurring motif in the processes of cooperation. On the other hand, almost a decade later, in 1990, professor of political science Ostrom (1990), the first, and to date, the only woman to win the Nobel Prize in Economic Sciences in the category of “economic governance, especially the commons,” in 2009
shared with Oliver E. Williamson
says in her CPR (common-pool resources) studies that the external authorities were not so necessary in the management of what we call common goods; she has studied several communities throughout the world (from the groups that manage the forest resources in Japan as far as irrigation systems in Spain, passing by the pastures in Switzerland and the Philippines) that produce public goods preserved for centuries. Into the search, Ostrom continued noting that all the efforts to organize a collective action must take into account a number of issues, such as the struggle against the parasitism (free-riding), problems with contracts, the organization of new institutions and the monitoring of people commitments in the set of rules. Ostrom (1990) found out that in all the communities that they work properly, there is a system of monitoring and sanctions: “The control and punishment are important, not only to punish the cheaters, but also to show others that each one has its own role, and many of them cooperate only because everybody else is doing.” And she complements to demonstrate that their commitment to cooperation is as strong as the temptation of being a stowaway (free-rider), because the fear of punishment prevents, but does not motivate. Something must encourage people to contribute to the public good. The peer-to-peer (P2P networking) social pressure helps the community to maintain the essential collective confidence, as in the case of manifestations in Brazil, mainly organized through the Facebook social network. The reputation is used by people in the community to measure the oscillation between the public good and the personal interest. Thus, we came to the following conclusion regarding Smart Mobs (adapted from Rheingold, 2002): identity, border, stimuli to the participation, and the punishment of the crooks seem to be the basis on which the groups are based on the participation of its members in cooperative activities, which are the social processes that are affected by technologies that allow users to generate reputation, to reward the cooperation, and punish the offenders.

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Public Management Models There are not many generic public management models in the world, especially in the United States and in Europe, and they are characterized as theoretical constructions of modernity. According to Secchi (2009), three organizational and relational models throughout the world have inspired the design of the structures and processes in the recent public management reforms. These models are the bureaucracy, managerialism (new public management), and public governance. Despite the recent administrative reforms have been preaching the progressive replacement of the bureaucratic model for these two new models of management, before configured as rupture models, they are actually self-promotion speeches of politicians and bureaucrats aiming to deceive the citizens regarding the performance of their governments and to pass an image that they are “up to date” on the “newest management practices”
which, in fact, have few new elements. In spite of these new models bring with them potential for substantial changes that can solve the public management problems all over the world in the short term
as it is usually preached by their enthusiasts
Secchi (2009) points out that the potential changes that they may cause only occur in the long term and still in a few aspects, because they share essential characteristics with the traditional bureaucratic model. The “pure” bureaucratic model was systematized by German sociologist Weber (1982) and it is characterized by the following aspects: the regency of jurisdiction areas is fixed and official, sorted by laws and administrative rules; the authority relations are bounded by rules concerning the means of coercion and consensus; the hierarchical relation is established by defined jobs and levels of authorities, in addition to a command and subordination system with activity management and tasks delegated by the authority; the administration is formalized by means of documents, which ultimately regulate the conduct and activities of persons. This model was adopted by the public administration in the whole world, especially from the west in the twentieth century, characterized by high specialization of functions, impersonality, rationalism, control, formality, and meritocratic professionalism. However, in the last decades of the century, the criticisms of the model have been intensified, leading to administrative reforms aiming to develop new “managerial” models. Discipline, readily interpreted as conformance with regulations, whatever the situation, is seen not as a measure designed for specific purposes but becomes an immediate value

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in the life-organization of the bureaucrat. This emphasis, resulting from the displacement of the original goals, develops into rigidities and an inability to adjust readily. Formalism, even ritualism, ensues with an unchallenged insistence upon punctilious adherence to formalized procedures. This may be exaggerated to the point where primary concern with conformity to the rules interferes with the achievement of the purposes of the organization, in which case we have the familiar phenomenon of the technicism or red tape of the official. An extreme product of this process of displacement of goals is the bureaucratic virtuoso, who never forgets a single rule binding his action and hence is unable to assist many of his clients. (Merton, 1957, p. 197)

The managerialism, according to Secchi (2009), can be considered as the combination of two more specific models, which are the managerial public administration or “new public management” (NPM) and the “entrepreneurial government” (EG), as a pragmatic style of public management; both share the values of productivity, service orientation, decentralization, efficiency in the services provision, marketization, and accountability.
Marketization is the term used for the use of market mechanisms within the public sphere. Example of market mechanisms is the public service user’s freedom of choice to select the provider and the introduction of competition between public organizations and between public organizations and private agents. […]
Accountability literally means the accountability on the part of those who have been entrusted with a task to that has requested the task (relationship between the agent and the principal). The accountability can be considered as the sum of the concepts of entrustment, transparency, and control (Secchi, 2009, p. 354).

Following this historical “evolution,” in the transition from the twentieth century to the first century, so in the last few decades, we have seen arise another new organizational model of public administration called public governance, characterizing itself as a horizontal relationship model between public and private sector stakeholders in the public policies’ elaboration process (Kooiman, 1993). Societal governance are arrangements in which public as well as private actors aim at solving societal problems or create societal opportunities, aim at the care for the societal institutions within which these governing activities take place, and phrasing the principles according to which these activities are carried out. The term governance denotes conceptual or theoretical ideas about such governing activities. (Kooiman, 2003, p. 229)

In addition, it rescues the policy within the public administration, decreasing the importance of technical criteria in the decision-making processes and strengthening participatory mechanisms of deliberation in the public sphere. Because it is still very recent, and by following the Secchi’s notes (2009), previously referenced, of which the new models can cause changes only in the long term and still in a few aspects, due to the

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sharing of essential characteristics with the traditional models, it is concluded that the public governance is still a model under construction. For all these reasons, it is presented a comparative summary framework with common features and more relevant differences to the new public administration’s organizational models in the world (Table 1).

Public Management Models in Brazil Historically, the public administration in Brazil had as dominate organizational models the patrimonialism, the bureaucracy, and the new public management (NPM). As the country in its roots was once an European cologne, more specifically from Portugal, it is crystallized in their culture the habit of trying to solve their problems or improve their processes, bringing foreign solutions, believing themselves to be the best, without concerning to adapt or examine them critically based on Brazilian specificities, for example, the “sociological reduction” concept by Ramos (1996). With the deployment of public management models in Brazil have not been different. In this way, for the didactic purpose, it is presented a comparative summary framework
own drafting by authors, with the information adapted from Filippim, Rossetto, and Rossetto (2010)
with the main characteristics and more relevant differences to the “passing” of Table 1.

Basic Characteristics of Organizational Models.

Characteristic Systemic function Systemic relationship with the environment Distinction between politics and administration Administrative functions emphasized Administrative discretion Citizen

Bureaucracy

Managerialism (NPM and EG)

Public Governance

Homeostasis Closed

Homeostasis Open

Separated

Working together under Distinction political control overcome Controlling and planning Controlling and coordinating High N.A.a Customer Partner

Controlling and organizing Low User

Homeostasis Open

Source: Adapted from Secchi (2009, p. 364). a The Public Governance devotes little attention to matters such as internal organizational autonomy of managers, vertical or administrative decentralization.

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patrimonialism for new organizational models in Brazilian public administration (Table 2). Regarding the public administration reforms cases in the world, it has already been explained earlier that the new models can cause changes only Table 2. Basic Characteristics of Organizational Models in Brazil. Characteristic

Patrimonialism

Bureaucracy

New Public Management

Historical periods

Colonial Brazil, Empire and Old Republic

Vargas Era (Getu´lio Vargas), Second Republic and Military Rule

New Republic, Redemocratization and Neoliberalism

Initial decade

1800

1930

1990

Main administrative Transfer of the Blow [Coup d’e´tat ] of State Administrative Reform (1995), fact Portuguese Royal the Estado Novo during the President Family to Brazil (1937) leading Fernando Henrique (1808), passing to Getu´lio Vargas to Cardoso’s command it to close the centralized Administration, power and discourse of the deployment of an Third Way and expanded and managerial practices, professionalized resulting from state bureaucracy private sector Administrative functions emphasized

Controlling and directing

Controlling and organizing

Controlling and planning

Administrative discretion

Total

Low

High

Practices and elements

Developmentism; Specialization of Personal loyalty to productivity; service; efficiency; representative; management by legalism; focus on favoritism, results; efficiency; controls; discipline; welfarism; effectiveness; impersonality; clientelism; competitiveness; formalism; tradition and purely service orientation; authority; hierarchy personal points of decentralization; view; predominance accountability of household power in decisions drawing up and allocation of resources

Source: Own drafting.

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in the long term and still in a few aspects, due to the sharing of essential characteristics with the traditional models. In Brazil, this is even more profound, because the bureaucracy and the managerialism were not fully developed in the country, touching canvass in cultural characteristics (authoritarianism, the personalism, and the colonelism present historically in Brazilian political context); leading to the construction of a hybrid model in Brazilian public management: a mix of patrimonialism, bureaucracy and managerialism, as well as signs of social management
also called public governance, an emerging organizational model. Zwick, Teixeira, Pereira, and Vilas Boas (2012) argue that Brazilian hybrid model is an authentic and genuine public management model
despite inspired on foreign models, but mixing and “tropicalizing” them, not by critical sense, but by the typical dysfunctions of paternalist historic heritage, which did not allow the full deployment of bureaucracy and, even by half, it had already to “accept” the foreign managerialism, it was also not fully implemented
plotting the “tupiniquim public administration,” as an objective possibility, based on N (Need; instrumental rationality; “cage of iron”) and P (Possibility; substantial, substantive rationality) theories of Ramos (2009). This author clarifies the mentioned concepts, affirming that the instrumental rationality occurs when acts or elements can contribute to reach a predetermined goal through the interaction with other acts or elements, assessing this type of rationality on the basis of a pre-established objective, independent of the content that actions may have. Regarding the substantive rationality, this occurs when the act is inherently intelligent, based on a lucid and autonomous knowledge of relations between facts, independent of its integration with other acts, assessing this type of rationality because of the quality of the content of their actions, by their intellectual accuracy, attesting the human being transcendence as a creature endowed with reason, it always worries to safeguard their conscience and especially the freedom of each individual, in its search for emancipation (Ramos, 1983). The proposed model by Zwick et al. (2012) is presented in Fig. 1. Fig. 1 represents an organizational model as an objective possibility for the Brazilian public administration, that is, in the genuine and authentic way to manage the “public good” in Brazil, a continuum between the strength of the structure maintainer of the status quo (instrumental rationality) and the strength of the transforming action (substantive rationality), in constant development, as a proposal for the emancipation of the new dependence of Brazil regarding the so-called “developed countries.” The Tupiniquim public administration integrates, mainly, the bureaucratic, managerial (N Theory, instrumental rationality), and the social

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Evolution of Public Administration in Brazil

Patrimonialism

Bureaucracy

Managerialism

Social management

Tupiniquim public administration

N Theory Instrumental rationality Strength of the structure: Import of public administration models and dashes of Brazilian culture.

Fig. 1.

P Theory Substantive rationality Strength of the action: Peculiarities of Brazilian culture and social management practices.

Tupiniquim Public Administration. Source: Adapted from Zwick et al. (2012, p. 295).

management (P Theory, substantive rationality) approaches. However, there is an important caveat regarding the presence of patrimonialist approach, partially included in the circle that identifies a Brazilian genuinely public administration. Even though it has been fought by governments since the 1960s, the patrimonialism has not yet been cleared of Brazilian public practices. Therefore, although it should not incorporate the model of tupiniquim public administration, when we think of an ideal type of administration to be conquered, in Fig. 1 the patrimonialist approach still continues to demonstrate that the presence of this cultural practice cannot be ignored, while its overrun remains a challenge. Among the peculiarities expressed by the Brazilian culture, we highlight the practices of social administration as promoters of the public administration evolution in Brazil (Zwick et al., 2012, pp. 295
296). The public governance or social management, also called “societal public administration” by Paes De Paula (2005b), is characterized as a horizontal model of the relational decision-making processes (communicative action) between public and private sector actors through mechanisms of participation in the policy making of the public sphere (Habermas, 1984); although the administrative function emphasized continues being the controlling, as in previous models, the “coordinating” function occupies quite a place in this model, because the government seeks to coordinate all the

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actors involved in the formulation and implementation of the public policies. In this model, the best-known example in Brazil consists of the participatory budgeting, especially in the municipalities, where the mayors invite the population to decide where the public money should be allocated later in the next year. This model reinforces the emerging practice of social control, which requires the action of Supreme Audit Institutions, with their specific tasks of auditing and monitoring that are characterized for exercising control in a more focused and integrated way, unlike the social control, that is more diffuse
although no less important
aiming to carry out the controlling function more effectively regarding managers who administer the Brazilian goods, public money, and values, against corruption in all its forms.

Principle 10 (Anti-Corruption) of United Nations Global Compact Initiative The United Nations Global Compact is both a policy platform and a practical framework for companies that are committed to sustainability and responsible business practices. Launched in 2000, as a multi-stake-holder leadership initiative, it seeks to align business operations and strategies with ten universally accepted principles in the areas of human rights, labor, environment and anti-corruption, and to catalyze actions in support of broader UN goals. With 8,000 corporate signatories in 145 countries, it is the world’s largest voluntary corporate sustainability initiative (UN Global Compact, 2014). The UN Global Compact Working Group on the 10th Principle
Businesses should work against corruption in all its forms, including extortion and bribery
appointed a taskforce on Sport Sponsoring and Hospitalities to create a guidance document for small, medium, and large companies on how to understand and fight corruption in sport sponsorship and hospitality. Thus, it can be considered a corporate social responsibility (CSR) initiative, because the corporate sector acts with socially responsible firms, in this case against frauds (Leonard & Gonzalez-Perez, 2013). The guide was launched on June 12, 2014, on the same day the 2014 FIFA World Cup began in Brazil, and it will be discussed in the findings topic later.

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APPROACH For this research, it was used as methodological basis a qualitative approach, defined, according to Van Maanen (apud Easterby-Smith, Thorpe, & Lowe, 1999, p. 71), as a series of interpretative techniques that seek to describe, decode, translate and, in some way, to reach an agreement with the meaning, not the frequency, of certain phenomena that occur in a more or less natural way in the social world; admitting the influence of the researcher in the “object” that will be studied and even the fact that the authors of this work are federal public servants, having, in some way, the duty and the responsibility to manage the public “thing” (Denzin & Lincoln, 2005; Denzin & Guba, 2006; Flick, 2004; Vieira, 2004; Vieira & Zouain, 2005). This research draws both on primary and secondary qualitative data, especially the literature of smart mobs, as well as public management models in Brazil, mainly based on Guerreiro Ramos, which constitutes the theoretical framework for the analysis, as well as “deep interviews” with citizens, which was protesting against the FIFA World Cup, that were analyzed through an interpretative approach, the phenomenography, where the collected material on reports of 18 respondents was recorded and transcribed for analysis, adopting the hermeneutic phenomenological orientation methodology as in previous collection stage, by following the previously formulated guiding questions. These 18 respondents were interviewed at the beginning of each manifestation (a total of 3), with 6 respondents in each of them, carried on Copacabana beach, Rio de Janeiro, Brazil (Atlantic Avenue), in June and July 2014. The majority of respondents were college students in courses such as history, cultural production, pharmacy, and communication; some of them work as public servants, but most of them as a freelancer, particularly in the area of communication and cultural production. For the delimitation of the expected number of interviews (sample), between 15 and 20, it was followed guidance from phenomenographic study by Sandberg (2000), which points to a reach of saturation on the variation of a phenomenon after such delimitation, after which, according to this author, new concepts hardly emerge in interviews, with responses becoming repetitive; what occurred in this research with the completion of 18 interviews. Given the recent smart mobs in Brazil and the lack of clear analytical axes for the orientation of research in organizational studies regarding the Brazilian public administration, as well as fragmentation in their respective academic production, it is hoped that these analytical reflections can

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contribute to promote academic progress for the Public Management in Brazil, as well as for the Corporate Citizenship all over the world. According to Vergara (2004), the entire method has possibilities and limitations and it is healthy to anticipate the criticism through the presentation of the possible limitations of the chosen method, but that still justifies it as the most appropriate to the purpose of the research. The chosen method for this work presents the following difficulties and limitations regarding the treatment of the data: if you use critical theory, especially phenomenology on the basis of concepts such as public sphere and of communicative action (Habermas, 1984), a limitation concerns to the very complexity of the implementation of this dialectic method, due to its theoretical consistency, requiring of the researcher abstraction capacity and academic rigor to not “fall” into positivist deviations
contrary to what the method intends to achieve.

FINDINGS Whereas the guide “Fighting Corruption in Sport Sponsorship and Hospitality” was released by UN Global Compact Working Group on the 10th Principle (Anti-Corruption) on June 12, 2014, on the same day the 2014 FIFA World Cup began in Brazil, and the recent smart mobs despite the 2014 FIFA World Cup to protest against government corruption, based mainly on the construction of Infrastructure for 2014 FIFA World Cup in Brazil, it can be seen that both civil society as socially responsible companies are fighting against corruption in government. These popular manifestations that happened in Brazil sounds with “Clean Games Sectoral Agreement
business sector unites against Corruption in the FIFA World Cup 2014 and the 2016 Olympic Games in Brazil” (UN Global Compact, 2014), a project that aims to promote greater transparency and integrity of infrastructure investments in the 2014 FIFA World Cup and the 2016 Olympic Games, through the creation of mechanisms for collective action, monitoring, and social control, by UN Global Compact members too. The respondents’ reports analyzed confirm that smart mobs are mainly organized through the Facebook social network, and the citizens which was protesting against the FIFA World Cup support the United Nations Global Compact initiative, mainly the 10th Principle (Anti-Corruption), besides supporting the work of the Public Prosecutor’s Office (Brazil),

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Brazilian Federal Court of Accounts and Courts of Justice (Brazil). On the other hand, they do not support the current model of the Executive Branch, claiming that it was not intended to “interact” with social demands and to defeat the corruption in government. The majority of respondents stated that the reason for participating in manifestations is due to fight for the rights of health, education, and security, and also fight against corruption, particularly regarding the diversion of public resources, and especially the construction of Infrastructure for 2014 FIFA World Cup in Brazil, what sounds with UN Global Compact Working Group on the 10th Principle (Anti-Corruption), contributing to the effectiveness of the UN Global Compact initiative as a whole. Furthermore, the majority respondents’ reports analyzed confirm that the protesters do not support the vandalism acts or the political parties’ militants “piggybacking,” but they refute the idea to dissuade free-riders to not make them, in order to maintain only the peaceful manifestations, even though the majority of them are declared non-partisan, while respecting the differentiated option of others. The research findings confirm that the Brazilian public administration model oscillate between elements related to instrumental rationality and substantive rationality
with the predominance of one of them in each context or moment
in a continuum with each other, but in practice it can lead the people involved to a shock of rationalities, adversely affecting the administration, which should get more substantiality to fulfill its social function, which is the actual realization of the common good.

FINAL REMARKS In a cut of the Brazilian reality, especially of the popular manifestations (smart mobs) that happened in Brazil from June 2013, in parallel with the realization of the FIFA Confederations Cup, to July 2014, despite the 2014 FIFA World Cup in Brazil, we have discussed analytically on how the smart mobs are established in comparison with the organizational model of the contemporary public management in Brazil, which reinforces the growing practice of social control; diffuse, although no less important, and aiming to carry out the controlling function more effectively regarding managers who manage the Brazilian property, funds and public goods and values. Therefore, we can see that the control agencies (instrumental rationality) can be used to optimize the public resources in support to social control,

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and in the assistance of the coordination of public and private actors who are helping to improve the public management model in Brazil through the development of the management (substantive rationality), trying to overcome the patrimonialist and bureaucratic dysfunctions that are still present in the model as well as soften the “greed” of the economic “managerialism,” toward a more appropriate model to the country reality and becoming increasingly more aware of foreign “fashions,” regarding the possibility that they will be critically adapted; until the social management, characterized as a horizontal model of the relational decision-making processes (communicative action) between actors of the public and private sectors through participation mechanisms for policy making in the public sphere (Habermas, 1984), will be able to fulfill the democratic aspirations of the Brazilian society. This led to the construction of a hybrid model of public administration in Brazil: a mixture of patrimonialism, excessive bureaucracy and managerialism, as well as signs of social management, defended by Zwick et al. (2012) as a genuine model of Brazilian public management
objective possibility
based on the N (Necessity, instrumental rationality; “iron cage”) and P (Possibility; substantial, substantive rationality) theories by Ramos (2009), as described in the theoretical framework. Yes, there is a certain relation between the organizational model of the Brazilian public administration, especially the Executive Branch, with these facts, because, to the extent that the Brazilian government organizational model was not intended to “interact” with society, it contributed to generate an unsatisfied demand for democracy in Brazilian citizens. It is still too recent to predict, but as an assumption
or suggestion
the Brazilian government must now seek to increase the application of social management and defeat the corruption in government, just as it has pursued both civil society organized as businesses, such as the UN Global Compact Anti-Corruption initiative; but citizens should also reflect well on the whole affair and vote with a greater awareness in the Brazilian 2014 elections. Thus to the extent that the protests despite the 2014 FIFA World Cup was going on, especially related to infrastructure investments, they contributed to reinforce the UN Global Compact initiative, mainly the 10th Principle (Anti-Corruption), because both companies and civil society have joined in this fight for greater transparency, integrity, and efficiency in public spending; everyone towards the substantive rationality. On the other hand, in parallel with the control agencies, the UN Global Compact initiative can contribute with the social control supporting a more

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interactive decision-making model, the public governance (social administration), to the extent that the “Clean Games Sectoral Agreement
business sector unites against Corruption in the FIFA World Cup 2014 and the 2016 Olympic Games in Brazil” project to promote the creation of mechanisms for collective action, monitoring, and social control. This work only has begun a general reflection on the relations between these study objects, in order to foster new research; there is much more to be done. It is expected that this work will help to increase the debate about the importance of the Brazilian public management to include substantive rationality for managers, so they can better understand and respond more effectively to the needs of the Brazilian people, as well as for the Corporate Citizenship all over the world. In a more critical perspective, where the dichotomy between theory and practice has been already overcome, the configuration of the model may bring an awakening of consciences to public managers and servers, as well as society in general, which the Brazilian researcher-teacher Demo (2005) would call “emancipation process,” motivating, respectively, the interest for improvements, changes that will make a difference for the better in public management in Brazil, and the monitoring of this management results by society
social control; a reawakening of citizens that will be aware of their duties, rights, and responsibilities, by charging transparency in the administration of public goods and the accountability regarding the managers’ acts and the extent of the results. That will benefit the whole society, as a reward for the taxes paid by each Brazilian citizen.

REFERENCES Demo, P. (2005). Pesquisa: Princı´pio cientı´fico e educativo. Sa˜o Paulo: Cortez. Denzin, N., & Guba, E. (2006). O planejamento da pesquisa qualitativa: Teorias e abordagens. Porto Alegre: Artmed. Denzin, N., & Lincoln, Y. S. (2005). Handbook of qualitative research. London: Sage. Easterby-Smith, M., Thorpe, R., & Lowe, A. (1999). Pesquisa gerencial em administrac¸a˜o: Um guia para monografias, dissertac¸o˜es, pesquisas internas e trabalhos de consultoria. Sa˜o Paulo: Pioneira. Filippim, E. S., Rossetto, A. M., & Rossetto, C. R. (2010). Abordagens da administrac¸a˜o pu´blica e sua relac¸a˜o com o desenvolvimento em um contexto regional: O caso do Meio-Oeste catarinense. Cad. EBAPE.BR, 8(4), 734
752, dez. Flick, U. (2004). Uma introduc¸a˜o a` pesquisa qualitativa. Porto Alegre: Artmed. Habermas, J. (1984). A mudanc¸a estrutural da esfera pu´blica: Investigac¸o˜es quanto a uma categoria da sociedade burguesa. Rio de Janeiro: Tempo Brasileiro.

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Kooiman, J. (1993). Modern governance: New government-society interactions. Newbury Park, CA: Sage. Kooiman, J. (2003). Societal governance. In I. Katenhusen & W. Lamping (Eds.), Demokratien in Europa (pp. 229
250). Hannover: VS Verlag fu¨r Sozialwissenschaften. Leonard, L., & Gonzalez-Perez, M. A. (2013). The corporate paradox: Marketing, innovation, corruption and pollution
An overview of corporate successes and failures. In L. Leonard & M. A. Gonzalez-Perez (Eds.), Principles and strategies to balance ethical, social and environmental concerns with corporate requirements (Vol. 12, pp. 1
19). Advances in Sustainability and Environmental Justice. Bingley, UK: Emerald Group Publishing Limited. Merton, R. K. (1957). Bureaucratic structure and personality. In Idem, social theory and social structure: Toward the codification of theory and research (pp. 195
206). Glencoe: Free Press. Ostrom, E. (1990). Governing the commons: The evolution of institutions for collective action: Cambridge: Cambridge University Press. Paes De Paula, A. P. (2005a). Administrac¸a˜o pu´blica brasileira: Entre o gerencialismo e a gesta˜o social. RAE, 45(1), 36
49. Paes De Paula, A. P. (2005b). Por uma nova gesta˜o pu´blica: Limites e potencialidades da experieˆncia contemporaˆnea. Rio de Janeiro: FGV. Ramos, A. G. (1983). Administrac¸a˜o e contexto brasileiro. Rio de Janeiro: FGV. Ramos, A. G. (1996). A reduc¸a˜o sociolo´gica. Rio de Janeiro: UFRJ. Ramos, A. G. (2009). A modernizac¸a˜o em nova perspectiva: Em busca do modelo da possibilidade. In F. G. Heidemann & J. F. Salm (Eds.), Polı´ticas pu´blicas e desenvolvimento: Bases epistemolo´gicas e modelos de ana´lise (pp. 41
79). Brası´ lia, DF: UnB. Rheingold, H. (2002). Smart mobs: The next social revolution. New York, NY: Basic Books. Sandberg, J. (2000). Understanding human competence at work: An interpretative approach. Academy of Management Journal, 43(1), 9
25. Secchi, L. (2009). Modelos organizacionais e reformas da administrac¸a˜o pu´blica. RAP, 43(2), 347
369. UN Global Compact. (2014). Fighting corruption in sport sponsorship and hospitality: A practical guide for companies. New York, NY: United Nations Global Compact Office. Vergara, S. C. (2004). Projetos e relato´rios de pesquisa em administrac¸a˜o. Sa˜o Paulo: Atlas. Vieira, M. (2004). Por uma boa pesquisa (qualitativa) em administrac¸a˜o. In M. M. F. Vieira & D. M. Zouain (Eds.), Pesquisa qualitativa em administrac¸a˜o (pp. 13
28). Rio de Janeiro: FGV. Vieira, M., & Zouain, D. (2005). Pesquisa qualitativa em administrac¸a˜o: Teoria e pra´tica. Rio de Janeiro: FGV. Weber, M. (1982). Ensaios de sociologia. Rio de Janeiro: LTC Editora. Zwick, E., Teixeira, M., Pereira, J., & Vilas Boas, A. (2012). Administrac¸a˜o pu´blica tupiniquim: Reflexo˜es a partir da Teoria N e da Teoria P de Guerreiro Ramos. Cad. EBAPE. BR, 10(2), 284
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TRADE OPENNESS, FINANCIAL LIBERALIZATION, ECONOMIC GROWTH, AND ENVIRONMENT EFFECTS IN THE NORTH-SOUTH: NEW STATIC AND DYNAMIC PANEL DATA EVIDENCE Xiuping Hua and Agyenim Boateng ABSTRACT Purpose
This chapter investigates the long-run relationship between trade, financial openness, economic growth, and carbon dioxide emissions across 167 countries over the period 1970
2007. Methodology/approach
We employ both standard panel least squares and dynamic Generalized Method of Moments approaches to overcome problems of mis-specification inherent in the prior literature. Findings
We find a strong link between economic growth, trade, financial openness, and environment. For the entire sample and industrial countries, our results support the environmental Kuznets curve (EKC).

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 253
289 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017020

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Our results also suggest that while economic growth, trade financial, and openness reduce CO2 emissions for all countries, the countries from the North appear to benefit more from trade and financial openness than the countries from the South in terms of reduction in CO2 emissions. Research implications
The results imply that policy makers should not seek to limit efforts to link trade openness and financial liberalization to environmental quality but to set trade policy-making, economic growth, and financial liberalization in a broader context to take into account environmental concerns as these issues are inextricably linked. Originality/value
This chapter extends the existing literature by comparing the extent to which trade openness and financial liberalization influence the carbon emissions in the North and South. Keywords: Trade; financial openness; economic growth; CO2 emissions; environment

INTRODUCTION One notable phenomenon in the international economic environment over the past two decades has been the liberalization of trade and finance (Lane & Milesi-Ferretti, 2007). Countries from the “North” and “South” continue to either deepen or liberalize trade and financial sector under the auspices of World Trade Organization (WTO) and International Monetary Fund (IMF). It is argued that these reforms and the Doha “Development” Round of GATT will lead to improvement in market access for goods, services, and capital, removal of price distortions as trade and capital flow restrictions are brought down resulting in real gains for all economies and the environment (Kose, Prasad, Rogoff, & Wei, 2010; Mukhopadhyay, 2007, 2009; World Bank, 2007). At the same time, scholars such as Jensen (1996) and Munasinghe (1999) point out that more trade results in greater use of natural resources and consumption activities thereby creating more waste, pollution, and more pressure on environment. Pioneering contributions in this area stress the importance of pure economic growth as a major source of environmental degradation (Grossman & Krueger, 1995; Shafik, 1994). Despite this, theoretical and empirical assessment of the relationship between trade liberalization, economic growth, and environment is still far

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from clear (Copeland & Taylor, 2004). It is therefore not surprising that policy makers, trade officials, WTO’s Committee on Trade and Environment often seek to limit efforts to link trade and environmental policy-making and sometimes to prohibit such efforts altogether (Esty, 2001). More recently, there is increasing realization among economists that the link between trade, economic development, and environment is a matter of fact, and therefore attempts should be made to set trade policymaking and economic development in a broader context that take environmental concerns into economic development and the international trading system (Summers, 2000). However, trade, economic development, and environmental policy-making still remain a sensitivity issue for a number of reasons: First, to developing countries which are attempting to break out from shells of poverty, any impediments placed on their way to access international markets constitute the desire to perpetuate the North-South divide. Second, pollution heaven hypothesis (PHH) posits that due to weak environmental policies in developing countries, rich countries in the North shift pollution-intensive industries and “dirty” production to developing countries with lower environmental standards (Kearley & Riddel, 2010; Kukla-Gryz, 2009) and therefore joint efforts from both North and South are needed at international level to achieve key policy objective to mitigate the adverse effects of global climate change, that is, reduction of global CO2 emissions. Another important strand of this chapter is that while prior studies have examined trade, economic growth, and environmental quality, only few studies, to the best of our knowledge, such as Tamazian, Chousa, and Vadlamannati (2009) and Tamazian and Rao (2010), have considered financial development among other factors as the possible determinant for environmental performance in the context of transitional economies. They have employed several measures of financial development including those for financial liberalization and openness. The seminal contributions of Goldsmith (1969), McKinnon (1973), and Shaw (1973) established the relationship between financial liberalization and economic growth. Moreover, trade liberalization is often accompanied by financial liberalization through increase in FDI capital flows which in turn can speed up economic growth (Tamazian et al., 2009). Similarly, Freeney and Hillman (2004), Kim, Lin, and Suen (2010) emphasize that trade is strongly linked to financial development because development of financial markets mitigate informational asymmetries leading to more trade liberalization and trade flows. If financial liberalization leads to economic development, then it follows that financial liberalization impacts on the environment. Therefore assessing the

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trade and financial liberalization together will provide a full picture regarding their effects on environment. This chapter attempts to extend the literature by comparing the extent to which the trade openness and financial liberalization influence the carbon emissions in the North and South over the period 1970
2007. In pursuance of this objective, we also investigate the validity of environmental Kuznets curve (EKC) hypothesis in the context of developed and developing countries. The examination of both developed and developing countries is important in that understanding the impact of economic growth, trade, and financial liberalization on environment performance will facilitate the development of a more prescriptive policies as well broader approach to environmental issues in the North and South to achieve key policy objective of reducing global carbon dioxide (CO2) emissions through international efforts. We do so by using CO2 emissions as the environmental pollution measure which according to IPCC (2007) is the primary greenhouse responsible for the problem of global warming. According to The World Bank (2007), CO2 accounts for 58.8% of the greenhouse gas (GHG) and the key policy objective of Kyoto protocol is aimed at reducing CO2 emissions. Employing both the standard panel least squares (LS) modeling approach and the dynamic Generalized Method of Moments (GMM), this study attempts to overcome the econometrics weaknesses inherent in previous studies (see Stern, 2004 for review) and control for both country-and periodspecific unobserved heterogeneity, serial correlations, and endogeneity. Our empirical results for the combined sample of developed and developing countries indicate a strong link between economic development, trade openness and financial liberalization and environmental degradation. The results therefore render support for EKC hypotheses. We also document a strong support regarding the relationship between financial openness and environment performance. For industrial countries, our results support the EKC hypothesis and suggest that improvement in both trade openness and financial openness lead to a decline in CO2 emissions for both North and South. However, in comparison, our results suggest that countries from the South experience relatively less improvement in CO2 emissions from improved trade openness compared to their counterparts from the North. We also find that financial liberalization variables influencing a decline in CO2 emissions differ between the developed and developing countries groups. Overall, the results suggest that the environmental improvements accruing from, economic growth, trade openness, and financial liberalization are unequally distributed between the North and South with the North benefiting from a relatively higher decline in CO2 emissions.

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The rest of the chapter is organized as follows. The section “Relevant Literature” reviews the relevant literature. The section “Data and Descriptive Statistics” presents the data and the descriptive statistics. The section “Methodology” introduces the econometric methodology. The section “Empirical Results” presents the main results and discussion. The final section provides policy implications and conclusions.

RELEVANT LITERATURE Economic Development and Environment The pollution-economic growth nexus has received a great deal of attention in recent decades (Narayan & Narayan, 2010). The increased attention on this subject stems from the concerns regarding the climate change, particularly, the global warming with the resultant deterioration of environmental quality in the past two decades. Researchers such as Mukhopadhyay (2007, 2009) indicate that most of the world’s environmental indicators have seen a steady deterioration and that it is a fact that trade openness and economic growth lead to environmental degradation. The literature linking economic growth and pollution points to what is known as EKC. The EKC is an inverted U shape indicating that pollution levels tend to deteriorate in the early stages of industrialization and then improve as the income increases (Copeland & Taylor, 2004; Dinda, 2004). In later stages of industrialization, as the economy grows and income increases, the theory suggest that more attention is given to the environment and stringent environmental policies are implemented, thereby leading to improvement in environmental quality (Grossman & Krueger, 1991, 1995; Gu¨rlu¨k, 2009). A number of empirical studies such as Dinda (2004) and Kijima, Nishide, and Ohyama (2010) have rendered support for the inverted U-shaped relationship. It is pertinent to point out that a number of researchers have criticized the curve. For example, Stern (2004) suggested that these studies are flawed due to specification problems and other major econometrics weaknesses inherent in the empirical analyses. Despite the criticism of EKC, it still remains the dominant model explaining the relationship between trade, economic growth, and environmental quality. What remains controversial is the range of explanations offered by economists for the shape of EKC. For example, Arrow et al. (1995) argue that the shape could be due to the pattern reflecting the

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natural progression of economic development, from clean agrarian economies to polluting industrial economies to clean service economies. This mechanism may be facilitated by the pollution-exporting hypothesis of Suri and Chapman (1998) which posit that advanced countries export their pollution-intensive production to developing countries implying the laxity of trade policies of the South. Another explanation for the inverted U is that of political-economic model of Jones and Manuelli (1995) which involves the evolution of institutional structures capable of internalizing pollution related externalities. According to this explanation, at modest income levels, a country tends to focus on creating jobs, generating wealth, and consuming more without much regard to environmental damage. As a country develops, improving awareness or rising disutility from pollutants may increase the demand for abatement and clean up (Andreoni & Levinson, 2001). If the above is the case, then countries from the “South” which are at the earlier stages of economic development are more likely to experience environmental degradation than their counterparts from the “North.” By comparing the environmental performance of the North and South, this chapter attempts to shed further light on the explanatory power of the shape of EKC.

Trade and Environmental Performance In this study, we argue that since the primary purpose of liberalizing trade and financial sector is to increase economic growth, trade openness and financial liberalization unavoidably affect the level of environmental quality through their impact of Kuznets curve. The effects of economic growth on trade can be broken down into three effects: “scale” effect, “composition” effect, and “technique” effect. Scale effect suggests that increased pollution arises from expanded economic activity and greater consumption made possible by more wealth. Composition effect involves how emissions are affected by the composition of output, which is determined by the degree of trade openness as well as by the competitive advantage of the country. Technique effect arises from the tendency toward cleaner production processes as wealth increases and trade expands access to better technologies and environmental “best practices.” Thus the argumentation that growth improves the quality of environment can be used to mean that, above a certain level of per capita income, technique and composition effects will outweigh scale effects (Esty, 2001). While empirical evidence on the relative sizes of these effects is limited, however, it appears that expanded trade

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tends to worsen environmental conditions (Antweiler, Copeland, & Taylor, 2001). Studies examining the impact of trade openness on environmental quality have been mixed. For instance, using SO2 emission from 290 observation sites located in 108 cities representing 43 countries spanning the years 1971
1996, Antweiler, Copeland, and Taylor (2001) establish that, in general, free trade appears to be good for environment. Managi, Hibiki, and Tsurumi (2009) find trade benefit the environment in OECD countries but has detrimental effects in non-OECD countries. On the other hand, Antweiler, Copeland, and Taylor (1998) suggest that expanded trade may worsen environmental conditions. Anderson (1998) and Panayotou (1995) take the argument further and suggest that the odds that increased trade will have a net negative environmental impacts rise if resources are mispriced. Around the world, many critical resources such as water, timber, and oil are either underpriced or overpriced (World Bank, 1997). Even WTO acknowledges in its “Trade and Environment Special Report” that expanded trade can exacerbate pollution harms and natural resource management mistakes in the absence of appropriate environmental policies (Nordstrom & Vaughan, 1999).

Financial Development and Environmental Performance In the context of financial openness, prior studies suggest that financial openness enhance economic efficiency and ultimately growth (DeGregorio & Guidotti, 1995; Levine, 1997). Levine (1997, 2005) conducted a survey in respect of the relationship between the financial sector development and long-run growth. He argued that financial systems can accomplish five functions to ameliorate information and transaction frictions and contribute to long-run growth. These functions are facilitating risk reduction, acquiring information about investments and allocating resources, monitoring managers and exerting corporate control, mobilizing savings, and facilitating exchange. These functions facilitate investment and hence economic growth. Consistent to the above argument, financial development therefore increases cross-border capital flows via foreign direct investments (FDI). This is because the development of intermediation in developing countries, and the subsequent development of the markets for direct credit, increased access to world capital markets with which to undertake investments. Schumpeter (1911) made a similar point and indicated that bank credit and therefore financial intermediation is the main source and encouragement for innovative entrepreneurs to foster

260

XIUPING HUA AND AGYENIM BOATENG

economic development. If there is a link between financial development and economic growth, then it is also true to say that financial development has impact on the environment (see Tamazian & Rao, 2010). This is because greater financial sector development can facilitate financing of FDI projects in environmental sector at lower cost of capital. Tamazian and Rao (2010, p. 248) therefore argue that “FDI becomes relevant to EKC debate to the extent that investment is expected to contribute to economic growth in the host country.” However, it is important to point out that, it would be incorrect to assume that environmental effects of FDI-led growth will automatically be offset as income increases (Tamazian & Rao, 2010). Nordstrom and Vaughan (1999) argue that an increased willingness to pay for higher environmental quality will not happen by compelling necessity. Studies by Jensen (1996) and World Bank (2000) find that FDI may stimulate economic growth but it may also result in more industrial pollution and environmental degradation. However, prior literature has not scrutinized the above argument systematically. Empirical tests examining the relationship between financial development and environment are few in numbers and the conclusions are mixed. Using Chinese provincial data, He (2006) finds that FDI does not only enhance economic growth, but also result in more industrial pollution and environmental degradation. On other hand, Tamazian and Rao (2010) document positive evidence for FDI on environmental quality and suggest that higher levels of FDI help to achieve lower CO2 per capita emissions. To summarize, the literature on the relationship between trade openness, financial development, economic growth, and the environment is largely inconclusive. Besides, most of the studies do not consider serial correlations in carbon emission and endogeneity in income, trade, and financial development (Managi et al., 2009). Using a large data set from 167 countries, panel GMM estimation methodologies, which accommodate the serial correlations and endogeneity existing in panel data, are employed to shed more lights on the impact of trade openness, economic growth, and financial development on environmental performance.

DATA AND DESCRIPTIVE STATISTICS Our panel data set comprises macro variables retrieved from several sources, namely the World Bank’s database World Development Indicators, Financial Development and Structure Database constructed by Beck,

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261

Demirgu¨c¸-Kunt, and Levine (2000) and Beck and Demirgu¨c¸-Kunt (2009), External Wealth of Nations Mark II database constructed by Lane and Milesi-Ferretti (2007), and capital account openness index constructed by Chinn and Ito (2006). To address the robustness of the estimates and to ensure the generality of our results, an annual data set (unbalanced) for 167 countries over the period 1970
2007 are therefore collected. All countries contained in the data file of Chinn and Ito (2006) capital account openness (KAOPEN) index of 182 countries, except Afghanistan, Aruba, Haiti, Iraq, Israel, Lesotho, Luxembourg, Myanmar, Puerto Rico, Qatar, San Marino, Sa˜o Tome´ & Prı´ ncipe, Serbia and Montenegro, Somalia, and Timor Leste, are included in our data sample. The reason for deleting these 15 countries is due to a complete unavailability of their carbon emissions, GDP, industrial output, or trade openness data. Following the definitions given by Lane and Milesi-Ferretti (2007), we also divide the entire sample into two groups, namely, industrial countries group or the North that are long-standing OECD countries, and the emerging and developing countries group or the South that include all the remaining countries (see appendix for a full list of countries). CO2 is a global pollutant, which is considered as the most important gas that leads to greenhouse effect, and hence it is a suitable choice for global environmental pollution measure. We use two indicators for carbon emissions. The first is CO2 emissions per capita (metric tons), and the second is CO2 emissions (kg per 2000 US$) of GDP. Following the standard EKC literature, the GDP per capita (constant 2000 US$) is used to investigate the relationship between economic growth and environmental performance, while the international trade share (i.e., exports plus imports) of GDP is used as the measure for trade openness. All of them are retrieved from World Development Indicators. There is no generally accepted measure of financial liberalization and therefore both de jure and de facto measures are employed in this study. In together nine measures of financial openness are used. Our first indicator of financial liberalization, the “de jure” measure, is the Chinn and Ito (2006) index of capital account openness (KAOPEN). The Chinn-Ito index (KAOPEN) is an index measuring a country’s degree of capital account openness. The index was initially introduced in Chinn and Ito (2006). KAOPEN is based on the binary dummy variables that codify the tabulation of restrictions on cross-border financial transactions reported in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). The data file contains the Chinn and Ito index series for the time period of 1970
2008 for 182 countries.

262

XIUPING HUA AND AGYENIM BOATENG

The second measure is net inflows of FDI of GDP, which is retrieved from World Development Indicators. We also consider alternative measures of integration and the roles played by various components of aggregate gross stocks of external assets and liabilities. The third to fifth measures comes from External Wealth of Nations Mark II database constructed by Lane and Milesi-Ferretti (2007), which contains data for the period 1970
2007 for 178 economies. These three indicators for measuring the degree of international financial integration are total external assets (FDI assets + portfolio equity assets + debt assets + derivatives assets + FX reserves) of GDP, total external liabilities (FDI liabilities + portfolio equity liabilities + debt liabilities + derivatives liabilities) of GDP, and total external assets plus liabilities of GDP. The sixth to ninth indicators include international debt issues to GDP, international loans from non-resident banks to GDP, off-shore deposit to domestic deposits (amount outstanding) to GDP, and remittance inflows to GDP. They come from Financial Development and Structure Database constructed by Beck et al. (2000) and Beck and Demirgu¨c¸-Kunt (2009) and subsequently updated in 2008. It is believed that these variables provide a comprehensive measures in respect of the degree to which a country’s financial system is interlinked with international financial markets. International debt issues to GDP measures the net flow of international bond issues relative to a country’s economic activity. International loans from non-resident banks to GDP are equal to loans of Bank International Settlements (BIS) reporting banks to a specific country relative to economic activity. Off-shore to domestic deposits is the ratio of deposit held by a country’s nationals in off-shore banks relative to deposits in domestic banks. Remittance inflows to GDP measure the flow of official remittance flow relative to economic activity. The reader is referred to Beck and Demirgu¨c¸-Kunt (2009) for more details on such indicators.

Control Variable Economic development means industrialization and during the sample period, industrialization has become the main goals of many emerging and developing countries. Two main factors may lead to environmental damage that occurs during expansion of economic activities in the process of industrialization. First, the harmful by-products of production damage the environment. High levels of pollution and water contamination accompany the expansion of industry. The second factor is the increased consumption of

Liberalization and Environmental Effects

263

natural resources. The extensive over-use of land, deforestation, and mining of mountains are a form of environmental damage in and of itself (Hanley, Shrogen, & White, 2001). To account for the impact of industrialization on the environmental quality, this study adopts industrial value added of GDP, which is retrieved from World Development Indicators, as the control variable. We have tried other control variables such as manufacturing value added of GDP, and the results are very similar. We choose the former because it includes a broader range of industries. Table 1 presents the descriptive statistics of all variables for the entire sample and its two sub-samples. The table shows a large variation in economic growth and the degree of trade openness and financial liberalization across countries. CO2 emissions per capita vary from 0.0006 to 84.52 metric tons, while CO2 emissions of GDP vary from 0.0029% to 15.172%. Similar results are captured in most variables, such GDP per capita, trade share of GDP, FDI net inflow of GDP, and total external assets. There are obvious differences between the two groups. On average, industrial countries generate 9.5 metric tons of CO2 emissions per capita, while emerging and developing countries generate 3.823 metric tons per capita. The differences in economic growth and financial liberalization are striking within the two groups. The average capital account openness (KAOPEN) index is 1.247 for the North, but is only −0.237 for the South. The average total external assets and liabilities of GDP is 254.2% for the North, but is only 154.8% for the South. The ratio of international debt issues to GDP is averaged at 37.86% for the North, but is only 9.259% for the South. Nevertheless, the South group has a higher ratio of FDI net inflow of GDP and remittance inflows to GDP, namely 3.161% and 5.55%, than those of the North group, 2.157% and 1.27%. It is reasonable as foreign direct investments and remittances (funds received from migrants working abroad) constitute the largest two financial inflows in many developing countries (Aggarwal, Demirguc-Kunt, & Peria, 2011; UNCTAD, 2010).

METHODOLOGY To assess the long-run relationship between trade openness, financial liberalization, economic growth, and the CO2 emissions, two econometric methods are used. We first use panel least squares estimations to test the EKC hypothesis to control for both country- and period-specific unobserved heterogeneity, and then use a dynamic panel GMM estimation technique

264

Table 1. Summary Statistics. Variables Mean

Median

Std. dev.

4.5281 1.2462

1.6631 0.6979

5,378 78.288 −0.027 3.0045

Industrial Countries

Minimum Maximum

Mean

Median

7.0787 1.6704

0.0006 0.003

84.52 15.17

9.5001 8.559 0.534 0.518

1664.1 68.912 −0.782 1.2666

7392.2 45.631 1.5106 6.3770

62.24 0.309 −1.831 −82.89

49,329 438.1 2.50 145.2

19,631 63.57 1.1808 2.157

Minimum Maximum

Mean

Median

3.934 0.22

1.6857 0.13

22.848 1.2526

3.823 1.369

1.208 0.777

7.143 1.778

0.0006 0.0028

84.52 15.17

7,856 30.69 1.383 5.108

4,282 11.25 −1.831 −15.05

42,132 184.4 2.50 92.67

2912.4 80.86 −0.237 3.161

1,232 72.26 −1.136 1.347

4,681 47.298 1.431 6.57

62.24 0.309 −1.831 −82.89

49,329 438.1 2.50 145.2

61.286

27.217

126.38

0.000

1,777

96.793 53.36

131.97

5.919

1277.6

54.991

25.184

124.3

0.000

1,777

101.07

68.094

147.42

0.651

3,095

108.87 69.63

124.66

8.262

1295.4

99.69

67.61

151.1

0.651

3,095

162.44

105.5

238.18

5.5365

3,415

205.66 124.02

254.2

18.42

2573.1

154.8

103.5

234.4

5.5365

3,415

16.439

8.539

25.194

0.0248

332.6

34.85

24.396

37.86

2.351

332.65

9.259

5.605

11.85

0.0248

102.2

59.115

9.98

374.79

0.078

9,786

47.168 28.642

46.54

10.31

306.2

60.898

8.17

401.4

0.078

9,786

1.676

0.181

17.497

0.003

335.6

0.121

0.074

0.129

0.0025

1.0008

1.913

0.212

18.77

0.004

335.6

4.724

1.033

25.225

0.0013

754.82

0.741

0.366

1.27

0.0057

9.765

5.55

1.513

27.64

0.0013

754.82

30.014

28.978

12.526

1.882

95.696

31.843 31.494

5.328

19.49

48.087

29.68

28.055

13.39

1.882

95.696

18,742 58.53 1.247 1.069

Std. dev.

Emerging and Developing Countries Std. dev.

Minimum Maximum

XIUPING HUA AND AGYENIM BOATENG

CO2 emissions per capita CO2 emissions of GDP (%) GDP per capita Trade of GDP (%) KAOPEN FDI net inflow of GDP (%) Total external assets of GDP (%) Total external liabilities of GDP (%) Total external assets and liabilities of GDP (%) International debt issues to GDP (%) Loans from non-resident banks to GDP (AMT outstanding) (%) Off-shore deposit to domestic deposits Remittance inflows to GDP (%) Industrial value added of GDP (%)

Entire Sample

Liberalization and Environmental Effects

265

to control for potential biases associated with endogeneity. Each estimation method is described later. Static Panel Least Square Estimation Using static panel least square estimation method, we test whether inverted U-shaped effect may be confirmed for our data sample. Following the standard EKC literature, we simply make the following specification:  2 lnðCO2 Þi;t = ai þ θt þ β1 lnðYÞi;t − 1 þ β2 lnðYÞi;t þ β3 Xi;t þ ɛi;t

ð1Þ

where the subscript i stands for a country index (i = 1,…, N), t is a time index (t = 1,…, T), ln(CO2)i,t is the dependent variable, the logarithms of CO2 per capita or CO2 emissions of GDP, ln(Y)i,t stands for the logarithms of GDP per capita, Xi,t is a vector of explanatory variables, such as trade and financial openness indicators, β is a vector of parameters to be estimated, ai is country specific effect, θt represents time specific effect, and ɛi,t is the stochastic error term which is in general allowed to be serially correlated. Both fixed and random effects treatments are adopted in the estimation. In this static model, evidence supporting the EKC is found if β1 > 0 and β2 < 0. Dynamic Panel GMM Estimation Besides heterogeneity, endogeneity of explanatory variables may also affect the estimates and it is hard to assume strict exogeneity for all the explanatory variables. Dynamic panel data models estimated using the GMM technique have become an important tool in dealing with endogeneity in the empirical analysis. Arellano and Bond (1991) use the GMM estimation technique to deploy additional instruments obtained by utilizing the orthogonality conditions that exist between the lagged values of the dependent variable and disturbances. It is argued that the GMM estimates generally result in smaller variances. Following Arellano and Bond (1991) and Tamazian and Rao (2010), we adopt the GMM estimation to control for the potential endogeneity of all the explanatory variables, and the instrumental variables are all the right-hand side variables lagged twice or more. The Sargan test based on the full Arellano and Bond (1991) instrument set is used to test the over-identifying restrictions.

266

XIUPING HUA AND AGYENIM BOATENG

The following benchmark specification for dynamic GMM estimation to explain the relationship between trade and financial openness and environmental degradation is adopted.  2 lnðCO2 Þi;t = ai þ θt þ β1 lnðCO2 Þi;t − 1 þ β2 lnðYÞi;t þ β3 lnðYÞi;t þ β4 Xi;t þ ɛi;t ð2Þ where ln(CO2)i,t is the dependent variable, the logarithms of CO2 per capita emissions or CO2 emissions of GDP, ln(Y)i,t stands for the logarithms of GDP per capita, Xi,t is a vector of explanatory variables as described above, β is a vector of parameters to be estimated, ai is country specific effect, θt represents time specific effect, and ɛi,t is the stochastic error term which is in general allowed to be serially correlated. In this dynamic models, evidence supporting the EKC is found if β2 > 0 and β3 < 0.

EMPIRICAL RESULTS Static Panel LS Estimation Results Cross-country random-effects estimation is run at first and generally the Hausman test results indicate there are some mis-specifications. Therefore the panel least square models are estimated with both country- and periodspecific fixed effects. The estimates for per capita CO2 emissions as a function of ln(GDP), ln(GDP)2 , trade openness, financial liberalization variables and control variables for the entire sample, developed countries, and developing countries groups are presented in Tables 2
4, respectively. Each table consists of nine different models using different measures of financial liberalization. The results for the entire sample are reported in Table 2. For all the nine models, the coefficients of ln(GDP) and ln(GDP)2 , with the exception of models 7 and 8, are significant at the 1% level with correct signs to support the existence of EKC. The results also indicate that trade openness appears to have a negative relationship with per capita CO2 emissions. It is important to point out that the negative relationship between trade openness and per capita CO2 emissions are found in eight of the nine models of the regression results, with only one exception where the trade openness enters the equation with a positive coefficient at 10% significance level. Regarding the financial liberalization, six of the nine measures

Fixed Effects Regression of Static Panel Least Square Estimator for CO2 Per Capita in the Entire Sample.

Constant ln(GDP) [ln(GDP)]2 Trade openness KAOPEN

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

−8.7482*** (0.3836) 1.6188*** (0.1037) −0.0563*** (0.0069) −0.0011*** (0.0003)


−8.7462*** (0.3610) 1.6008*** (0.0978) −0.0545*** (0.0065) −0.0011*** (0.0001)


−8.7547*** (0.3854) 1.6148*** (0.1027) −0.0562*** (0.0067) −0.0012*** (0.0003)


−8.6927*** (0.3748) 1.5951*** (0.1009) −0.0547*** (0.0067) −0.0011*** (0.0003)


−7.8485*** (0.6153) 1.5620*** (0.1480) −0.0566*** (0.0093) −0.0002 (0.0003)


−4.8553*** (0.6101) 0.6108*** (0.1649) 0.0085 (0.0112) −0.0015*** (0.0003)


−6.2545*** (0.6189) 0.9772*** (0.1652) −0.0151 (0.0109) −0.0015*** (0.0003)


−7.5768*** (0.4844) 1.4324*** (0.1280) −0.0514*** (0.0084) −0.0011*** (0.0003)


−0.0023** (0.0009)




























































































−0.0002*** (0.0001)




















































































−0.0018*** (0.0005)


0.0095*** (0.0008)

0.0104*** (0.0009)

0.0106 *** (0.0008)

0.0109*** (0.0008)

0.0108*** (0.0008)

0.0061*** (0.0011)

0.0112*** (0.0011)

0.0118*** (0.0011)

−0.0001 (0.0001)


−0.0001* (0.0000)

−0.0002 (0.0003)


−0.0001 (0.0001)

0.0014*** (0.0002) 0.0085*** (0.0012)

267

FDI net inflow of GDP Total external assets to GDP Total external liabilities to GDP Total external assets plus liabilities to GDP International debt issues to GDP Loans from nonresident banks to GDP (AMT outstanding) Off-shore deposit to domestic deposits Remittance inflows to GDP Industrial value added of GDP

(1) −9.1858*** (0.3346) 1.7173*** (0.0892) −0.0623*** (0.0058) 0.0004* (0.0002) −0.0115** (0.0048)


Liberalization and Environmental Effects

Table 2.

Country fixed effects dummies Year fixed effects dummies Countries included Number of observations R2

(Continued )

268

Table 2. (1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

167 4,446

166 4,384

164 4,569

164 4,576

164 4,569

101 1,418

162 1,842

160 1,963

157 3,409

0.979

0.973

0.974

0.974

0.974

0.986

0.992

0.991

0.975

Note: Standard errors are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% significance levels, respectively.

XIUPING HUA AND AGYENIM BOATENG

Fixed Effects Regression of Static Panel Least Square Estimator for CO2 Per Capita in the Industrial Countries Group. (1)

Constant ln(GDP) [ln(GDP)]2 Trade openness KAOPEN FDI net inflow of GDP

(3)

(4)

(5)

(6)

(7)

(8)

(9)











































0.0125*** (0.0019) Yes

0.0139*** (0.0019) Yes

0.0118*** (0.0019) Yes

0.0115*** (0.0019) Yes

0.0117*** (0.0019) Yes

0.0154*** (0.0019) Yes

0.0175*** (0.0026) Yes

−0.2142** (0.0898)
0.0198*** (0.0024) Yes


0.0002 (0.0088) 0.0135*** (0.0022) Yes

269

Total external assets to GDP Total external liabilities to GDP Total external assets plus liabilities to GDP International debt issues to GDP Loans from non-resident banks to GDP (AMT outstanding) Off-shore deposit to domestic deposits Remittance inflows to GDP Industrial value added of GDP Country fixed effects dummies

(2)

−60.148*** −62.736*** −60.417*** −61.027*** −60.709*** −40.647*** −26.825*** −33.417*** −56.575*** (2.5203) (2.3545) (2.4580) (2.4543) (2.4526) (0.6153) (6.3018) (5.9596) (3.7977) 12.473*** 13.028*** 12.423*** 12.552*** 12.483*** 8.3541*** 5.5374*** 6.9181*** 11.663*** (0.5123) (0.4800) (0.5029) (0.4976) (0.4994) (0.1480) (1.2693) (1.2132) (0.7586) −0.6229*** −0.6535*** −0.6151*** −0.6217*** −0.6180*** −0.4088*** −0.2664*** −0.3394*** −0.5785*** (0.0262) (0.0247) (0.0006) (0.0256) (0.0258) (0.0347) (0.0643) (0.0621) (0.0382) −0.0057*** −0.0048*** −0.0051*** −0.0051*** −0.0050*** −0.0027*** −0.0020*** −0.0019*** −0.0052*** (0.0005) (0.0006) (0.0006) (0.0006) (0.0006) (0.0005) (0.0007) (0.0006) (0.0006) 0.0000







(0.0061)
−0.0006






(0.0010)

−0.0002**





(0.0001)

−0.0002**




(0.0001)



−0.0001**



(0.0000)




0.0000


(0.0002)





−0.0001

(0.0003)

Liberalization and Environmental Effects

Table 3.

Year fixed effects dummies Countries included Number of observations R2

270

Table 3. (Continued ) (1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

22 774 0.9364

22 761 0.9398

22 779 0.9345

22 779 0.9346

22 427 0.9753

22 256 0.9805

22 273 0.9814

22 627 0.9365

22 779 0.9346

Note: Standard errors are reported in parentheses. *** and ** denote statistical significance at the 1%, 5%, and 10% significance levels, respectively.

XIUPING HUA AND AGYENIM BOATENG

Fixed Effects Regression of Static Panel Least Square Estimator for CO2 Per Capita in the Emerging and Developing Countries Group.

Constant ln(GDP) [ln(GDP)]2 Trade openness KAOPEN FDI net inflow of GDP

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

−6.0568*** (0.4668) 0.7435*** (0.1321) 0.0111 (0.0093) −0.0007** (0.0003)


−6.7527*** (0.4250) 0.9558*** (0.1187) −0.0053 (0.0082) −0.0009*** (0.0003)


−6.7204*** (0.4524) 0.9464*** (0.1245) −0.0046 (0.0085) −0.0009*** (0.0003)


−6.7842*** (0.4374) 0.9623*** (0.1215) −0.0056 (0.0084) −0.0009*** (0.0003)


−6.3044*** (0.8514) 1.1175*** (0.2165) −0.0258* (0.0141) −0.0001 (0.0004)


−3.8812*** (0.7166) 0.3326* (0.1947) 0.0282** (0.0133) −0.0014*** (0.0003)


−5.4136*** (0.7351) 0.7334*** (0.1987) 0.0022 (0.0133) −0.0015*** (0.0003)


−4.0225*** (0.6087) 0.3820** (0.1659) 0.0231** (0.0112) −0.0004 (0.0003)


−0.0023** (0.0010)
























































































0.0001 (0.0001)






















































































−0.0017*** (0.0006)


0.0075*** (0.0009) Yes

0.0085*** (0.0010) Yes

0.0092*** (0.0009) Yes

0.0091*** (0.0009) Yes

0.0091*** (0.0009) Yes

0.0066*** (0.0014) Yes

0.0109*** (0.0012) Yes

0.0115*** (0.0012) Yes

0.0000 (0.0001)


0.0000 (0.0000)


0.0004 (0.0006)


−0.0001 (0.0001)

0.0013*** (0.0003) 0.0048*** (0.0014) Yes

271

Total external assets to GDP Total external liabilities to GDP Total external assets plus liabilities to GDP International debt issues to GDP Loans from non-resident banks to GDP (AMT outstanding) Off-shore deposit to domestic deposits Remittance inflows to GDP Industrial value added of GDP Country fixed effects dummies

(1) −6.8724*** (0.3972) 0.9706*** (0.1102) −0.0053 (0.0076) −0.0001 (0.0003) −0.0111** (0.0056)


Liberalization and Environmental Effects

Table 4.

Year fixed effects dummies Countries included Number of observations R2

(Continued )

272

Table 4. (1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

145 3,672 0.9747

144 3,623 0.9653

142 3,790 0.9670

142 3,797 0.9670

142 3,790 0.9670

79 991 0.9829

140 1,586 0.9899

138 1,661 0.9891

136 2,782 0.9671

Note: Standard errors are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% significance levels, respectively.

XIUPING HUA AND AGYENIM BOATENG

Liberalization and Environmental Effects

273

have significant impact on per capita CO2 emissions with five measures being negative and one being positive, that is remittance inflows to GDP. Overall, the results suggest the existence of an inverted U-shaped relationship between economic growth and CO2 emissions. Regarding the trade openness and financial liberalization, we find that trade and financial liberalization reduce CO2 emissions across countries in the North and South. The results of countries from the North and South groups are shown Tables 3 and 4 respectively. Our estimated results indicate that whereas the North group indicates an inverted U-shape relationship between economic growth and CO2 emissions, the findings of the South group suggest the existence of the EKC is not unequivocal among the developing countries. For developed countries group, all the coefficients for ln(GDP) and ln (GDP)2 are significant at 1% level and with correct signs thereby rendering support the existence of an EKC. However, we observe that our fixed effect models for developing countries group suggest that all the coefficients for ln(GDP) are correctly signed and have significant and positive impact on CO2 emissions. Regarding the ln(GDP)2 , only three out of the nine models are statistically significant with one being negative and statistically significant at 10% while two models have positive and statistically significant effect on CO2 emissions. The results suggest a mixed support for EKC hypothesis among the developing countries. Perhaps the results may be explained by the fact that countries from the South in their quest to improve their economies tend to pay relatively less attention to environment thereby leading to, at best, modest reductions in CO2 emissions. This may come through either laxity in environmental standards or a huge desire to increase economic growth by exploiting competitive advantage of their countries without regard to environment damage as pointed out by Jones and Manuelli (1995). For both developed and developing countries groups, the results show that trade openness has negative impact on CO2. In respect of the South, as seen in Table 4, trade openness has six of the nine equations being statistically significant and negatively signed. The coefficient values of trade openness for the North vary from −0.19% to −0.57%, while South values vary from −0.01% to −0.14%, implying that improvement in trade openness leads to CO2 emissions reduction. However, the reduction in CO2 emissions is higher for the North compared with the South. The results appear consistent to the explanation often offered by economists that countries from the South which are at the earlier stages of economic development are more likely to experience environmental degradation than their counterparts from the North.

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Regarding the financial openness, Table 3 indicates that four measures, namely, total external assets to GDP, total external liabilities to GDP, total external assets plus liabilities to GDP, off-shore deposits to domestic deposits have negative and significant impact on CO2 emissions for the developed countries group. However, in the case of developing countries, Table 4 documents that, the index of capital account openness (KAOPEN), off-shore deposits to domestic deposits, FDI net inflow to GDP, have negative and significant impact on CO2 while remittances inflows to GDP appear to have a positive and significant bearing on CO2. The results suggest that whereas capital account openness (KAOPEN), FDI net inflow to GDP, and remittances inflows to GDP exert significant influence of per capita CO2 for developing countries group, these factors appear not to be important for developed countries. Perhaps, the findings may be explained by the stage of economic development of each group. This is because the stage of economic development in a particular country influences the financial liberalization measures necessary to further more economic growth. Although developing countries are diverse in terms of income and relative development, but they share a common legacy of planned economies and their financial liberalizations are focused on establishing stock markets, putting in place policies to attract FDI and foreign capital. Therefore the financial liberalization and development measures such as FDI net inflow to GDP, KAOPEN, remittance inflows to GDP measure the degree of integration of the financial sector and are essential for developing countries to achieve sustainable economic growth and hence environmental performance. For example, the finding that remittance inflows to GDP have positive and significant impact on environmental performance of South group indicates the significant role remittances played in developing economies and their impact on environmental performance. The results appear consistent to the conclusions by a number of development economists indicating that remittances by the migrant workers in developed countries are an important source of funds for long-run economic growth of developing countries (Aggarwal et al., 2011; Rao & Hassan, 2011). The results in respect of remittances tend to go into dirty production and consumption of goods that lead to higher CO2 emissions. This finding appears striking but it is expected as many developing countries have becoming dumping grounds for used goods such as cars, computers and other imports harmful to the environment of these countries. However, we find that FDI inflows improve environmental performance implying that governments in developing countries address environmental concerns in their investment codes. Regarding the countries from the North, the result that, total external

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275

assets to GDP; total external liabilities to GDP; total external assets plus liabilities to GDP; off-shore deposits to domestic deposits reduce CO2 emissions suggest that aggregate stock of external assets and liabilities facilitate the integration of financial system and increase fund flows among countries particularly, production agents in developed countries with which to undertake environmental projects. The control macroeconomic variable, the industrial value added share of GDP, have the expected sign at 1% significance level indicating that higher level of industrialization exerts a positive impact on the carbon emissions. We find that if the share of industry in GDP is increased by 1%, it leads to around 1
2% increase in per capita CO2 emissions.

Dynamic Panel GMM Estimation Results Tables 5
7 show the results of the dynamic panel using the GMM estimator. The tables also present the diagnostic test to assess the validation of instruments and check for the first- and second-order autocorrelation of the error term. Namely, AR(1) and AR(2) refer to the test for the null of no first-order and second-order autocorrelation in the first differenced residuals, whilst the Sargan test indicated the p-value for the appropriateness of the instruments we used and provide evidence of the validity of lagged levels dated t − 10 and earlier as instruments in our equations. Broadly speaking, the diagnostic test results suggest that the instruments are valid and the errors are not serially correlated. The results suggest significant serial correlations exist in the dependent variables of carbon emission per capita. As seen from Tables 5
7, in all the regressions the one period lagged coefficient of the carbon emission proxy are positive and significant at the 1% level, and the size of the coefficient varies from 0.2803 to 0.7559 across different samples and models. The comparison of the static LS and dynamic GMM estimates suggests similarities in the results indicating that the findings are consistent and robust across the two different techniques. The dynamic GMM estimation results generally confirm the existence of an inverted U-shaped relationship between economic growth and CO2 emissions for all models in the entire sample and the North, as shown in Tables 5 and 6. For the South, Table 7 reports relatively better link between economic growth and CO2 emissions compared to Table 4 and that EKC is present in six out of the nine regression models. However, it important to point out that both results do not provide unequivocal link between economic growth and CO2 emissions but

276

Table 5. CO2 per capitat − 1 ln(GDP)

Trade openness KAOPEN FDI net inflow of GDP Total external assets to GDP Total external liabilities to GDP Total external assets plus liabilities to GDP International debt issues to GDP Loans from nonresident banks to GDP (AMT outstanding)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

0.6742*** (0.0017) 1.3196*** (0.0121) −0.0605*** (0.0006) −0.0017*** (0.0000) −0.0313*** (0.0006)


0.7076*** (0.0014) 1.2357*** (0.0135) −0.0609*** (0.0009) −0.0014*** (0.0000)


0.6973*** (0.0013) 1.2690*** (0.0157) −0.0606*** (0.0010) −0.0013*** (0.0000)


0.6985*** (0.0016) 1.3091*** (0.0156) −0.0641*** (0.0010) −0.0013*** (0.0000)


0.6983*** (0.0013) 1.2766*** (0.0141) −0.0615*** (0.0008) −0.0013*** (0.0000)


0.7559*** (0.0003) 0.3241*** (0.0021) −0.0041*** (0.0001) −0.0008*** (0.0000)


0.5371*** (0.0113) 0.9918*** (0.1258) −0.0445*** (0.0084) −0.0033*** (0.0003)


0.5935*** (0.0097) 0.7349*** (0.1019) −0.0300*** (0.0067) −0.0030*** (0.0002)


0.6186*** (0.0008) 1.3691*** (0.0075) −0.0622*** (0.0005) −0.0018*** (0.0000)


0.0016*** (0.0001)























































−0.0001*** (0.0000)













−0.0018*** (0.0000)










−0.0001*** (0.0000)














0.0002*** (0.0000)











0.0001*** (0.0000)
































XIUPING HUA AND AGYENIM BOATENG

[ln(GDP)]2

Dynamic GMM Estimation Results for CO2 Per Capita in the Entire Sample.











































0.0012*** (0.0000) 166 4,167

0.0005*** (0.0000) 164 4,330

0.0010*** (0.0001) 164 4,336

0.0007*** (0.0000) 164 4,330

−0.0003*** (0.0000) 101 1,315

0.0033*** (0.0007) 162 1,680

0.0000 (0.0001) 167 4,210 0.1730 0.1650 0.5523

0.1270 0.0860 0.4851

0.1640 0.1180 0.5300

0.1640 0.1190 0.5075

0.1640 0.1190 0.4850

0.7940 0.9560 0.3184

Notes: Standard errors are reported in parentheses. Constant has been added into instrument list in GMM estimation. *** denote statistical significance at the 1%, 5%, and 10% significance levels, respectively.

0.1930 0.0710 0.2046

0.0011*** (0.0004)
−0.0005 (0.0005) 160 1,773 0.1480 0.0370 0.4536


0.0006*** (0.0000) 0.0003*** (0.0000) 157 3,236 0.2060 0.1530 0.4844

Liberalization and Environmental Effects

Off-shore deposit to domestic deposits Remittance inflows to GDP Industrial value added of GDP Countries included Number of observations AR(1) AR(2) Sargan test

277

Table 6.

Dynamic GMM Estimation Results for CO2 Per Capita in the Industrial Countries Group.

CO2 per capitat − 1 ln(GDP) [ln(GDP)]2 Trade openness KAOPEN FDI net inflow of GDP Total external assets to GDP

Total external assets plus liabilities to GDP International debt issues to GDP Loans from non-resident banks to GDP (AMT outstanding) Off-shore deposit to domestic deposits Remittance inflows to GDP Industrial value added of GDP Countries included Number of observations AR(1) AR(2) Sargan test

(3)

(4)

(5)

(6)

(7)

(8)

(9)

0.6222*** 0.6173*** 0.6129*** 0.6108*** 0.6117*** 0.4641*** 0.2803*** 0.3076*** 0.6754*** (0.0434) (0.0436) (0.0456) (0.0458) (0.0457) (0.0552) (0.0839) (0.0769) (0.0403) 4.4134*** 4.6821*** 4.4999*** 4.6201*** 4.5541*** 5.4218*** 5.4961*** 4.6492*** 4.2129*** (0.8051) (0.7603) (0.7970) (0.7942) (0.7956) (0.9314) (1.6241) (1.4460) (0.8300) −0.2145*** −0.2277*** −0.2148*** −0.2209*** −0.2175*** −0.2621*** −0.2641*** −0.2225*** −0.2044*** (0.0401) (0.0381) (0.0401) (0.0399) (0.0400) (0.0462) (0.0811) (0.0724) (0.0412) −0.0014*** −0.0012** −0.0010* −0.0009* −0.0010* −0.0012** −0.0018** −0.0018*** −0.0013*** (0.0005) (0.0005) (0.0006) (0.0006) (0.0006) (0.0005) (0.0007) (0.0007) (0.0005) 0.0046







(0.0071)
−0.0009





(0.0008)

−0.0002***





(0.0001)


−0.0002***




(0.0001)



−0.0001***



(0.0000)




0.0004*


(0.0002)




−0.0006*

(0.0003)






−0.0783
(0.0977)







0.0047 (0.0092) 0.0024 0.0016 0.0027 0.0024 0.0026 0.0012 0.0064** 0.0082*** 0.0028** (0.0017) (0.0015) (0.0017) (0.0016) (0.0017) (0.0017) (0.0031) (0.0028) (0.0014) 22 22 22 22 22 22 22 22 22 734 724 740 740 740 404 234 251 601 0.3140 0.3280 0.3640 0.3690 0.3670 0.1010 0.2230 0.1880 0.1590 0.3490 0.3680 0.3860 0.3910 0.3890 0.2140 0.1200 0.1080 0.2560 0.9222 0.9540 0.9985 0.9990 0.9988 0.2210 0.2275 0.1302 0.2584

Notes: Standard errors are reported in parentheses. Constant has been added into instrument list in GMM estimation. ***, **, and * denote statistical significance at the 1%, 5%, and 10% significance levels, respectively.

XIUPING HUA AND AGYENIM BOATENG

Total external liabilities to GDP

(2)

278

(1)

CO2 per capitat − 1 ln(GDP) [ln(GDP)]2 Trade openness KAOPEN

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

0.7294*** (0.0362) 1.1449*** (0.3426) −0.0565*** (0.0210) −0.0012* (0.0007)


0.7193*** (0.0369) 1.1747*** (0.3509) −0.0551*** (0.0212) −0.0014** (0.0007)


0.7197*** (0.0368) 1.1837*** (0.3705) −0.0567** (0.0228) −0.0016** (0.0007)


0.7202*** (0.0368) 1.1401*** (0.3610) −0.0533** (0.0221) −0.0015** (0.0007)


0.4886*** (0.0588) 0.2723 (0.5060) −0.0009 (0.0304) −0.0016 (0.0012)


0.4023*** (0.0792) 0.8841 (0.6039) −0.0387 (0.0357) −0.0018 (0.0012)


0.6219*** (0.0642) 0.8073 (0.5751) −0.0394 (0.0335) −0.0030** (0.0013)


0.6152*** (0.0456) 1.4150*** (0.3508) −0.0656*** (0.0209) −0.0019** (0.0008)




































































−0.0037** (0.0016)
















0.0024 (0.0018)




−0.0003 (0.0003)

























































































0.0019* (0.0010)


0.0137*** (0.0052)

−0.0081** (0.0039)

0.0018 (0.0015)

0.0018 (0.0015)

0.0014 (0.0016)

0.0000 (0.0002)


0.0022 (0.0014)

−0.0001 (0.0001)

0.0019 (0.0015)

−0.0008* (0.0005)

0.0001 (0.0022)


0.0007 (0.0004) 0.0018 (0.0029)

279

FDI net inflow of GDP Total external assets to GDP Total external liabilities to GDP Total external assets plus liabilities to GDP International debt issues to GDP Loans from nonresident banks to GDP (AMT outstanding) Off-shore deposit to domestic deposits Remittance inflows to GDP Industrial value added of GDP

(1) 0.6990*** (0.0379) 1.1842*** (0.3090) −0.0531*** (0.0186) −0.0019*** (0.0007) −0.0038 (0.0205)


Liberalization and Environmental Effects

Table 7. Dynamic GMM Estimation Results for CO2 Per Capita in the Emerging and Developing Countries Group.

Countries included Number of observations AR(1) AR(2) Sargan test

280

Table 7. (Continued ) (1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

145 3,476

144 3,443

142 3,590

142 3,596

142 3,590

79 911

140 1,446

138 1,522

136 2,635

0.1260 0.1210 0.4149

0.0890 0.0540 0.2700

0.1390 0.0950 0.6604

0.1330 0.0910 0.6083

0.1350 0.0920 0.6266

0.3250 0.2170 0.3200

0.3820 0.1800 0.8217

0.1870 0.0570 0.6113

0.2110 0.1530 0.8217

Notes: Standard errors are reported in parentheses. Constant has been added into instrument list in GMM estimation. ***, **, and * denote statistical significance at the 1%, 5%, and 10% significance levels, respectively.

XIUPING HUA AND AGYENIM BOATENG

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281

rather moderate link between the two variables. Regarding the impact of trade openness, we observed the same pattern of results as reported in Tables 3 and 4 indicating negative and statistically significant and negative impact for trade openness on CO2 emissions for both North and the South. The results suggest that trade openness reduce the CO2 emission in both the North and the South, however, the benefits are distributed unequally. Regarding the financial liberalization, we also observe similar results reported in Tables 3 and 4 and that different set of financial liberalization measures influence CO2 emissions in the North and South. However, six of the nine financial liberalization measures enter the regression models with negative coefficients, with four measures, namely, total external assets to GDP, total external liabilities to GDP, total external assets plus liabilities to GDP, and loans from non-resident banks to GDP, being statistically significant for the North confirming our results in Table 3. However, in the case of South group, only two indicators, namely international debt issues to GDP and loans from non-resident banks to GDP, exhibit significant negative impact on CO2 emissions. It is worth noting that the coefficient for the remittance inflows to GDP is positive but insignificant for both groups. To summarize, after correcting both the endogeneity of explanatory variables and serial correlations in the dependent variables, we still observe unequal impact of economic growth, trade openness, and financial liberalization on environmental performance across the two groups. The existence of EKC curve and the importance of trade openness and financial liberalization in reducing CO2 emissions is generally confirmed at the global level and for countries from the North group, but the results are mixed in the South group: trade openness is still good for the environment in most models, while the financial liberalization variables influencing CO2 emissions differ across the North and the South.

Additional Robustness Checks We used a different measure of the dependent variable, namely, CO2 emissions of GDP, for additional robust checks. The estimated panel LS models with both country- and period-specific fixed effects are reported in Table 8. In general, the estimates from the alternative definition are very similar to carbon emission per capita. The EKC is confirmed in seven models of nine, while trade openness has negative and significant impact on CO2 emissions. Financial liberalization enters five of the nine equations with a significant

Fixed Effects Regression of Static Panel Least Square Estimator for CO2 of GDP in the Entire Sample.

Constant ln(GDP) [ln(GDP)]2 Trade openness KAOPEN

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

−1.8331*** (0.3828) 0.6178*** (0.1037) −0.0564*** (0.0069) −0.0011*** (0.0003)


−1.8307*** (0.3611) 0.6005*** (0.0978) −0.0546*** (0.0065) −0.0011*** (0.0003)


−1.8347*** (0.3854) 0.6135*** (0.1027) −0.0563*** (0.0067) −0.0012*** (0.0003)


−1.7743*** (0.3749) 0.5941*** (0.1009) −0.0548*** (0.0067) −0.0011*** (0.0003)


−0.9528*** (0.6165) 0.5640*** (0.1483) −0.0567*** (0.0093) −0.0002 (0.0003)


−2.1569*** (0.6111) −0.4159** (0.1652) 0.0101 (0.0112) −0.0015*** (0.0003)


−0.7739 (0.6205) −0.0534 (0.1656) −0.0133 (0.0110) −0.0016*** (0.0003)


−0.6582 (0.4846) 0.4319*** (0.1280) −0.0515*** (0.0084) −0.0011*** (0.0003)


−0.0023** (0.0009)


















































































−0.0017*** (0.0006)











−0.0002*** (0.0001)



























































−0.0001 (0.0001)

−0.0001* (0.0000)

−0.0002 (0.0003)





−0.0001 (0.0001)




XIUPING HUA AND AGYENIM BOATENG

FDI net inflow of GDP Total external assets to GDP Total external liabilities to GDP Total external assets plus liabilities to GDP International debt issues to GDP Loans from nonresident banks to GDP (AMT outstanding) Off-shore deposit to domestic deposits

(1) −2.2723*** (0.3346) 0.7180*** (0.0892) −0.0625*** (0.0058) 0.0004* (0.0002) −0.0114** (0.0048)


282

Table 8.

























0.0096*** (0.0008) Yes

0.0106*** (0.0009) Yes

0.0107 *** (0.0008) Yes

0.0109*** (0.0008) Yes

0.0108*** (0.0008) Yes

0.0062*** (0.0011) Yes

0.0114*** (0.0011) Yes

0.0120*** (0.0011) Yes

0.0014*** (0.0002) 0.0087*** (0.0012) Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

167 4,446

166 4,384

164 4,569

164 4,576

164 4,569

101 1,418

162 1,842

160 1,963

157 3,409

0.9010

0.8880

0.8835

0.8836

0.9798

0.9711

0.9663

0.8998

0.8837

Note: Standard errors are reported in parentheses. ***, ** and * denote statistical significance at the 1%, 5%, and 10% significance levels, respectively.

Liberalization and Environmental Effects

Remittance inflows to GDP Industrial value added of GDP Country fixed effects dummies Year fixed effects dummies Countries included Number of observations R2

283

284

XIUPING HUA AND AGYENIM BOATENG

and negative coefficient. The size and sign of coefficients are also very similar. For instance, comparing the coefficients in Tables 2 and 8, most coefficients of explanatory and control variables appear similar. To conserve space, we do not report the results for developed and developing countries groups and techniques.

CONCLUSIONS AND IMPLICATIONS This main objective of this chapter is to examine and compare the effects of economic growth, trade openness, and financial liberalizations on CO2 emissions in respect of developed and developing countries. In pursuance of this objective, we also investigate the validity of EKC hypothesis utilizing a sample of 22 developed countries and 145 developing countries over the period 1970
2007. Two different panel techniques are employed to shed lights on the existence of EKC hypothesis in both North and South and the impacts of both trade openness and financial liberalization on CO2 emissions. Our empirical results for the combined sample of developed and developing countries indicate a strong link between economic growth development, trade openness, and financial liberalization on CO2 emissions. The results therefore render support for EKC hypotheses. The conclusion to be drawn from the results is that, far from being a treat to the environment in the long run, economic growth, trade openness, and financial liberalization appear to be important means to improve the environmental quality thereby render support for the findings of Meadows, Meadows, Randers, and Behrens (1992). We also document that there is evidence of a negative and significant link between trade openness and carbon emissions, irrespective of the different explanatory or control variables and estimation techniques used. Another important conclusion of this chapter is that our comparative analysis regarding the effects of economic growth and trade openness on CO2 emissions indicate that the levels of CO2 emissions from economic growth and trade openness tend to be higher for the North compared with the South. The results appear consistent with notion that countries from the South which are at the earlier stages of economic development are more likely to experience environmental degradation than their counterparts from the North. For both developed and developing countries, four different sets of financial liberalization measures in each case exert significant influence on environmental degradation. The conclusion emanating

Liberalization and Environmental Effects

285

from the results indicates that different sets of measures regarding financial liberalization affect environmental performance for developed and developing groups suggesting that levels of economic development matters when it comes to the impact of financial liberalization on environmental performance. The study also has a number of policy implications. First, the finding that economic development, trade openness and financial liberalization impact and particularly reduce CO2 emissions could help to alleviate some economic growth, trade-environment tensions. The results imply that policy makers should not seek to limit efforts to link trade openness and financial liberalization to environmental quality but to set trade policy-making, economic growth and financial liberalization in a broader context to take into account environmental concerns as these issues are inextricably linked. The results of this study also indicate that the North tends to reduce more CO2 emissions compared to the South suggesting that trade policies continue to either benefit developed countries more or developed countries export their pollution-intensive production process to the South. With increased globalization, this trend will continue if not checked and trade and capital controls for imports deemed harmful to the environment and “dirty” production may be necessary. Another important solution may lie with developed countries offering assistance to developing countries to set up effective environmental institutions to monitor and enact efficient laws to reduce the incidence of dumping of polluted goods in developing countries. Also tax and other incentives to help attract investments in environmental projects and reward companies investing in environmental friendly products will be a step in the right direction. The finding that remittance inflows to GDP have positive and significant impact on environmental performance of South group suggest that developing countries should give recognition to superior environmental performance through the institution of national and international awards for best performing for companies in terms of environment through national and international agencies such as United Nations.

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845. Kose, M. A., Prasad, E., Rogoff, K., & Wei, S.-J. (2010). Financial globalization and economic policies. In D. Rodrik & M. R. Rosenzweig. Handbook of development economics (4283
4359). North-Holland: Elsevier. Kukla-Gryz, A. (2009). Economic growth, international trade and air pollution: A decomposition analysis. Ecological Economics, 68, 1329
1339. Lane, P. R., & Milesi-Ferretti, G. M. (2007). The external wealth of nations mark II. Journal of International Economics, 73(November), 223
250. Levine, R. (1997). Financial development and economic growth: View and agenda. Journal of Economic Literature, 35, 688
726. Levine, R. (2005). Finance and growth: Theory and evidence. In P. Aghion & S. N. Durlauf (Eds.), Handbook of economic growth (pp. 865
934). Amsterdam: North Holland. Managi, S., Hibiki, A., & Tsurumi, T. (2009). Does trade openness improve environmental quality. Journal of Environmental Economics and Management, 58, 346
363. McKinnon, R. I. (1973). Money and capital in economic development. Washington, DC: Brooking Institution. Meadows, D. H., Meadows, D. L., Randers, J., & Behrens, W. (1992). The limits to growth. New York, NY: Universe Books. Mukhopadhyay, K. (2007). Trade and environment in Thailand: An emerging economy. New Delhi: Serial Publication. Mukhopadhyay, K. (2009). Trade and the environment: Implications for climate change, Decision, 36(3), 83
102. Munasinghe, M. (1999). Is environmental degradation an inevitable consequence of Economic growth: Tunneling through the environmental Kuznets curve. Ecological Economics, 29, 89
109. Narayan, P. K., & Narayan, S. (2010). Carbon dioxide emission and economic growth: Panel data evidence from developing countries. Energy Policy, 38, 661
666. Nordstrom, H., & Vaughan, S. (1999). Trade and environment: Special studies 4. Geneva: World Trade Organization. Rao, B. B., & Hassan, G. M. (2011). A panel data analysis of the growth effects of remittances. Economic Modelling, 28, 701
709. Schumpeter, J. A. (1911). The theory of economic development. Cambridge, MA: Harvard University Press. Shafik, N. T. (1994). Economic development and environmental quality: An econometric analysis. Oxford Economic Papers, 46, 757
773. Shaw, E. S. (1973). Financial deepening in economic development. London: Oxford University Press. Stern, D. I. (2004). The rise and fall of the environmental Kuznets curve. World Development, 32, 1419
1439.

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Summers, L. H. (2000). International financial crises: Causes, prevention, and cures. The American Economic Review, 90(2), 1
16. Suri, V., & Chapman, D. (1998). Economic growth, trade and energy: Implications for the environmental Kuznets curve. Ecological Economics, 25, 195
208. Tamazian, A., Chousa, J. P., & Vadlamannati, K. C. (2009). Does higher economic and financial development lead to environmental degradation: Evidence from BRIC countries. Energy Policy, 37, 246
253. Tamazian, A., & Rao, B. B. (2010). Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies. Energy Economics, 32, 137
145. UNCTAD. (2010). Trade and environment review 2009/10: Promoting poles of clean growth to foster the transition to a more sustainable economy. New York, NY: United Nations. World Bank. (1997). World development indicators, Washington, DC. World Bank. (2000). Is globalization causing a “race to the bottom” in environmental standard? In PREM economic policy group and development economics group. Washington, DC: The World Bank. World Bank. (2007). The little green data book 2007. Washington, DC: The World Bank.

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APPENDIX List of Countries Industrial countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States. Developing and emerging countries: Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belize, Benin, Bhutan, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Brunei Darussalam, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Cape Verde, Central African Republic, Chad, Chile, China, Colombia, Comoros, Dem. Rep. of Congo, Rep. of Congo, Costa Rica, Coˆte d’Ivoire, Croatia, Cyprus, Czech Republic, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Eritrea, Estonia, Ethiopia, Fiji, Gabon, Gambia, Georgia, Ghana, Grenada, Guatemala, Guinea, Guinea-Bissau, Guyana, Honduras, Hong Kong S.A.R. (China), Hungary, India, Indonesia, Iran, Jamaica, Jordan, Kazakhstan, Kenya, Kiribati, Korea, Kuwait, Kyrgyz Republic, Laos, Latvia, Lebanon, Liberia, Libya, Lithuania, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Malta, Mauritania, Mauritius, Mexico, Moldova, Mongolia, Morocco, Mozambique, Namibia, Nepal, Nicaragua, Niger, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Romania, Russia, Rwanda, Samoa, Saudi Arabia, Senegal, Seychelles, Sierra Leone, Singapore, Slovak Republic, Slovenia, Solomon Islands, South Africa, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent & Grenadines, Sudan, Suriname, Syrian Arab Republic, Tajikistan, Tanzania, Thailand, Togo, Tonga, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vanuatu, Venezuela Rep. Bol., Vietnam, Yemen, Zambia, Zimbabwe.

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LABOUR RELATIONS AND INTERNATIONAL BUSINESS: THE DOCTRINE OF CONSTRUCTIVE DISMISSAL AND LABOUR RELATIONS IN MALAYSIA Balakrishnan Muniapan ABSTRACT Purpose
There are ten universal principles of United Nations Global Compact in four areas namely human rights, labour, environmental and anti-corruption, and this chapter will explore the sixth principle of labour standard on elimination of discrimination in employment and occupation, in particular the doctrine of constructive dismissal in Malaysian labour relations. Constructive dismissal is creating a new challenge in labour relation in Malaysia. Methodology/approach
This chapter specifically analyses some of the constructive dismissal awards and its implication to labour relations in Malaysia. The methodology employed in this chapter is the analysis of case laws using criterion-based sampling from the Industrial and Superior Court awards on constructive dismissal.

Beyond the UN Global Compact: Institutions and Regulations Advances in Sustainability and Environmental Justice, Volume 17, 291
315 Copyright r 2015 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2051-5030/doi:10.1108/S2051-503020150000017021

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Findings
There has been an increasing number of awards on constructive dismissal made by the Malaysian Industrial Court over the last nine years. From the year 2009
2013, the Industrial Court has made 663 awards on constructive dismissal, mostly against employers. With compensation awarded to each employee amounted to as much as 24 months of back-pay salary plus a month’s pay for every year of service, employers can no longer neglect this pressing issue. Research limitations/implications
The concept of constructive dismissal falls within the purview of section 20 of the Industrial Relations Act 1967 in Malaysia. Constructive dismissal is a ‘deemed dismissal’ if an employer is guilty of a breach of the employment contract which goes to the root of the contract. It arises when a workman terminates his/her contract of employment and considers himself/herself discharged from further obligations because of the employer’s conduct. Practical implications
With a good understanding of the constructive dismissal awards, it is expected that organizations will manage and treat their human resources as their greatest assets and prevent constructive dismissal claims from taking place. This will eventually help to improve and maintain harmonious labour relations. This chapter is likely to provide insights into the Malaysian labour relations environment for international business operations. Originality/value
In the context of Malaysian labour relations, studies on constructive dismissal are limited as it is considered as a new area and a specific area of study. This chapter therefore hopes to fill the existing gap in the literature, to highlight some of the recent awards and lessons to prevent constructive dismissal claims from taking place and generally to contribute to the constructive dismissal literature. Keywords: Labour relations in Malaysia; dismissal; constructive dismissal; industrial law; international business and comparative industrial relations

INTRODUCTION The Global Compact asks companies to embrace universal principles and to partner with the United Nations. It has grown to become a critical platform for the UN to engage effectively with enlightened global business.
UN Secretary
General Ban Ki-moon

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The United Nations Global Compact is a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. The UN Global Compact is a principle-based framework for businesses, stating 10 principles in the areas of human rights, labour, the environment and anticorruption. The UN Global Compact was initially launched with nine Principles. The former Secretary General of the UN Kofi Annan, on 24 June 2004, during the first Global Compact Leaders Summit, announced the addition of the 10th principle against corruption in accordance with the UN Convention against corruption adopted in 2003. The principles of human rights are Principle 1: Support and respect the protection of internationally proclaimed human rights and Principle 2: Make sure that they are not complicit in human right abuses. In the area of labour standards, the principles are Principle 3: the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labour; Principle 5: the effective abolition of child labour; and Principle 6: the elimination of discrimination in employment and occupation. The principles with the area of environment include Principle 7: support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote environmental responsibility; and Principle 9: encourage the development and diffusion of environmentally friendly technologies. The anti-corruption principle is Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery (http://www.unglobalcompact. org). This chapter will explore the sixth principle of labour standard on elimination of discrimination in employment and occupation, in particular the doctrine of constructive dismissal in Malaysian labour relations. Discrimination in employment can arise from work-related activities such as: recruitment, remuneration, hours of work and rest, paid holidays, maternity protection, security of tenure, job assignments, performance assessment and advancement, training opportunities, job prospects, social security and occupational safety and health. Employees who experience discrimination at work are denied opportunities and have their basic human rights violated. An organization that uses discriminatory practices in employment and occupation denies itself access to talents from a wider pool of skills and competencies. The hurt and resentment generated by discrimination would affect the performance of employees in the organizations. Combating discrimination at the workplace can help reduce disadvantages, as when the organizations bring together employees of different races, sexes and ages, for example, and treat them equally, it helps build a

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sense of common purpose. By doing so it defuses stereotypes and prejudices that are at the heart of discrimination. Furthermore, from a business point of view discrimination does not make sense. It leads to social tensions that are potentially disruptive to the organization and the society (http://www. ilo.org/). Discrimination in employment may lead an employee to claim constructive dismissal. In the Malaysia, which is an emerging economy, constructive dismissal is creating a new challenge in labour relations. This is due to the increasing number of awards on constructive dismissal made by the Malaysian Industrial Court over the last nine years. From the year 2009
2013, the Industrial Court has made 663 awards on constructive dismissal, mostly against employers. With compensation awarded to each employee amounted to as much as 24 months of back-pay salary plus a month’s pay for every year of service, employers can no longer neglect this pressing issue. The concept of constructive dismissal falls within the purview of s. 20 of the Industrial Relations Act (1967). Constructive dismissal is a ‘deemed dismissal’ if an employer is guilty of a breach of the employment contract which goes to the root of the contract. It arises when a workman terminates his/her contract of employment and considers himself/herself discharged from further obligations because of the employer’s conduct.

LITERATURE REVIEW In the context of Malaysian labour relations, studies on industrial laws especially on constructive dismissal are limited as it is considered as a new area and a specific area of study. Over the years, some of the authors who have written about Malaysian industrial laws are Muniapan (2006, 2007, 2008, 2009, 2010, 2013), Muniapan and Parasuraman (2007), Ramasamy (2006), Mohamad (2006), Pathmanathan, Kanagasabai, and Alagaratnam (2003), Thavarajah (2008), Thavarajah and Low (2003), Aminuddin (2007, 2008), Ayadurai (1996), Anantaraman (1997, 2000), D’Cruz (2007), Kiong (2002), Idid (1993), Gomez (1997) and Wu (1995). Except for the studies done by Anantaraman (2000) and Thavarajah (2008), none of the studies have specifically dealt with constructive dismissals in depth. This chapter therefore hopes to fill the existing gap in the literature, to highlight some of the recent awards and lessons to prevent constructive dismissal claims from taking place and generally to contribute to the constructive dismissal and industrial law literature in Malaysia.

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METHODOLOGY Research in industrial (and employment) law involves the analysis of statutes and case laws. The statutes are the primary sources while the case laws are the secondary sources. However, none of the important statutes related to industrial law in Malaysia, such as the Employment Act (1955), Industrial Relations Act (1967) and Trade Unions Act 1959 have defined the term ‘constructive dismissal’, although constructive dismissal comes within the scope of ‘dismissal’ in s. 20 of the Industrial Relations Act (1967) as per the landmark judgment made by Tun Salleh Abbas, LP in Wong Chee Hong v Cathay Organization (M) Sdn Bhd (1988) 1 MLJ 92, SC. This chapter therefore is based on case analysis of some of the constructive dismissal awards made by the Industrial Court and the Superior Courts by using criterion-based sampling, and a review of existing literatures in the field of constructive dismissal in Malaysia. The author is familiar and has been involved in the field of industrial law in Malaysia as a lecturer, trainer and consultant and is familiar with industrial laws such as the Employment Act (1955) and the Industrial Relations Act (1967).

EMPLOYMENT AND LABOUR RIGHTS IN MALAYSIA Industrial laws in Malaysia provide security of employment for workmen1 as employment is considered to be a constitutional right and is protected by the Federal Constitution under Articles 5(1)2 and 8(1).3 This was clearly highlighted by the Industrial Court in Award 20/1997 (cited in D’Cruz, 2007), as follows: The right to livelihood is a right protected by Part II of the Federal Constitution. In consonance with the concept of social justice which is firmly entrenched in industrial jurisprudence is the principle that the security of tenure of an employee is akin to a right of property and is not to be treated lightly by a dismissing authority.

This is also evident in Kuching Plywood Bhd v Ng Tiong Hie (1994), whereby the dictum from the Supreme Court of India in Delhi Transport Corporation v DTC Mazdoor Congress (1991) was cited, and the Learned Chairman of the Industrial Court made the following observation (cited in D’Cruz, 2007): The right to life includes the right to livelihood. The right to livelihood therefore cannot hang on the fancies of individuals in authority. Employment is not a bounty from them

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nor can its survival be at their mercy. Income is the foundation of many fundamental rights and when work is the sole source of income the rights to work becomes as much fundamental. Fundamental rights can ill afford to be consigned to the limbo of undefined premises and uncertain applications. That will be a mockery of them.

From an international context, the International Labour Organization (‘ILO’) Convention No 158 of 1982, Article 4 of the ‘Convention Concerning Termination of Employment at the Initiative of the Employer’ (cited in Muniapan, 2007) made the following provision: The employment of a worker shall not be terminated unless there is a valid reason for such termination connected with the capacity or conduct of the worker or based on the operational requirement of the undertaking, establishment or service.

In industrial law, it is a well-established fact that the termination of employment is not an absolute right of employers. Practically, it can be a very traumatic and costly exercise and proper care and conduct must be exercised by the employer when effecting or embarking on such course of action (Thavarajah, 2008). Dismissal is just one of the types of termination of the employment contract; other types of termination include resignation, retirement, frustration of contract, termination due to breach of contract, non-confirmation of a probationer, ending of a fixed term contract and termination due to redundancy (retrenchment). Dismissal is commonly associated as an act of an employer firing or terminating an employee from employment. Dismissal is normally due to the workman’s misconduct, which is not consistent with the expressed or implied terms and conditions of employment. The Industrial Relations Act (1967) and the Employment Act (1955) regulate the dismissal of a workman and an employee in the context of Malaysian industrial laws. Dismissal is also one of the managerial prerogatives or managerial rights provided within the legal context. The Industrial Relations Act (1967), s. 13(3), recognizes the following managerial prerogatives or management rights: (1) the right to promote by an employer any workman from a lower grade or category to a higher grade or category; (2) the right to transfer by an employer a workmen within the organization of an employer’s profession, business, trade or work, provided that such transfer does not entail a change to the detriment of a workman in regard to his terms of employment; (3) the right to employ by an employer of any person that he may appoint in the event of a vacancy arising in his establishment;

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(4) the right to terminate by an employer of any workman by reason of redundancy or by reason of the reorganization of an employer’s profession, business, trade or work or the criteria for such termination; (5) the right to dismiss and reinstate a workman by an employer; and (6) the right to assign or allocate by an employer duties or specific tasks to a workman that is consistent or compatible with the terms of his employment. However, the right to dismiss an employee by an employer or any other management prerogatives is not absolute. This needs to be made clear to employers as the Industrial Court in Lim Sim Tiong v Palm Beach Hotel (1974) stated: It is the basic principle of industrial law that a court would be wrong to interfere with bona fide exercise of powers which are given to management by common law and by contracts of service or which are inherent in management. If there has been no abuse of discretion, no discrimination, no capricious or arbitrary action, if management has acted in good faith and upon fair investigation, an arbitrator should not disturb the decision taken by the employer. However as a court of equity and good conscience, this court will interfere not only where there has been victimization, but also where it is of opinion that upon the substantial merits of the case the action taken by the management was perverse, baseless or unnecessarily harsh or was not just or fair, or where there has been a violation of principles of natural justice, or where there has been unfair labor practice or other mala fide action on the part of the management in the exercise of its powers.

For employers, s. 14(1) of the Employment Act (1955) further states that the employer may, on grounds of misconduct inconsistent with the fulfilment of the express or implied conditions of his service, after due inquiry: (1) dismiss without notice the employee; (2) downgrade the employee and (3) impose any other lesser punishment as he deems just and fit. It is an established principle of industrial law that an employer must establish sufficient circumstances justifying dismissal such as misconduct. His Lordship Mohd AzmiFCJ stated in the case of Milan Auto Sdn Bhd v Wong She Yen (1995) 3 MLJ 537, FC, that the function of the Industrial Court in dismissal cases on a reference under s. 20 of the Industrial Relations Act (1967) is two-fold, namely: … first, to determine whether the misconduct complained of by the employer has been established, and secondly whether the proven misconduct constitutes a just cause or excuse for the dismissal … Thus the two questions, which the court had to ask itself, are: (i) was there a dismissal; and (ii) if the answer to (i) is in the affirmative, was the dismissal with or without just cause or excuse.

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Therefore in any dismissal made by the employer, the burden of proving the misconduct falls in the hands of the employer (not the employee) to provide the reasonable reasons for the dismissal. This was also clearly established by the Industrial Court in Stamford Executive Centre v Dharsini Ganesan (1985) 1 ILR 101, IC. The court commented: It may further be emphasized here that in a dismissal case the employer must produce convincing evidence that the workman committed the offence(s) he is alleged to have committed and for which he has been dismissed. The burden of proof lies on the employer. He must prove that the workman guilty and it is not the workman who must prove himself not guilty. This is so basic a principle of industrial jurisprudence that no employer is expected to come to this court in ignorance of it.

As a result, due inquiry based on the rules of natural justice is a must before dismissing an employee who is within the scope of the Employment Act (1955). The due inquiry is also necessary for a workman who is not within the scope of the Employment Act (1955) to fulfil the requirement of natural justice.4 Dismissal is the most severe punishment, which can be awarded to a delinquent workman by his employer mostly for some act of misconduct which had to be proven after the due inquiry. However in employment law, just as the employer has the right to dismiss the employee, the employee also has the right to dismiss the employer if there has been a fundamental breach of the employment contract by the employer, which goes to the root of the contract. In some circumstances, the employer’s act of unilateral changes in the terms and condition of the employment contract forces the workman to terminate the contract with or without notice. This kind of unfair dismissal is popularly known as ‘constructive dismissal’. The constructive dismissal awards made by the courts over the years have great implications to human resource management in Malaysia.

CONSTRUCTIVE DISMISSAL Constructive dismissal is a ‘deemed dismissal’ if an employer is guilty of a breach of the employment contract which goes to the root of the contract. It arises when a workman terminates his/her contract of employment and therefore considers himself/herself discharged from further obligations because of the conduct of the employer. According to Bowman and Hailsham (2005) in Halsbury’s Laws of England, constructive dismissal happens when an employee terminates the contract of employment with or

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without notice and may still make a claim to have been dismissed, if the circumstances are such that he or she terminated it by reason of the employer’s conduct or a breach of contract by the employer. The employee must leave immediately in response to the breach of contract. In a Canadian case, Farber v Royal Trust Co (1997), Canada’s Supreme Court defined constructive dismissal as follows: Where an employer unilaterally makes a fundamental or substantial change to an employee’s contract of employment
a change that violates the contract’s terms
the employer is committing a fundamental breach of the contract that results in its termination and entitles the employee to consider himself or herself constructively dismissed.

Constructive dismissal denotes the conduct of an employer, which is outrageous and makes continued employment impossible; a workman need not tolerate it and can treat himself or herself as dismissed (Lotteries Corporation Sabah Sdn Bhd v Vincent Lee, 1991) 1 ILR 554, IC. A much clearer explanation of constructive dismissal was given by Dato’ Gopal Sri Ram, JCA in Quah Swee Khoon v Sime Darby Bhd (2000) 2 MLJ 600, CA, who simply defines constructive dismissal as follows: An employer does not like a workman. He does not want to dismiss him and face the consequences. He wants to ease the workman out of his organization. He wants to make the process as painless as possible for himself. He usually employs the subtlest of means. He may, under the guise of exercising the management power of transfer, demote the workman … Alternatively; he may take steps to reduce the workman in rank by giving him fewer or less prestigious responsibilities than previously held. Generally speaking, he will make life so unbearable for the workman so as to drive the latter out of employment.

In a constructive dismissal, an employer is guilty of a breach of the employment contract which goes to the root of the contract or if the employer has shown and committed unreasonable actions or behaviours which repudiates the contract of employment. In such situations, the workman is entitled to regard the employment contract as having terminated and construe himself/herself as having been constructively dismissed. In Malaysia, the Supreme Court (now Federal Court) ruling by Tun Salleh Abas, LP in Wong Chee Hong v Cathay Organization (M) Sdn Bhd (1988) firmly established the doctrine of constructive dismissal. As a result, constructive dismissal has been brought within the ambit of s. 20 of the Industrial Relations Act (1967),5 which means dismissal rights under the law are now extended to those workmen who are compelled to resign because of the conduct of their employers (Anantaraman, 2000).

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However, constructive dismissal cases need to be analysed from a different perspective unlike wrongful dismissal and unfair dismissal or from any other type of employment terminations, as in a constructive dismissal, the burden of proof is on the workman to prove that his/her employer is guilty. The term ‘wrongful dismissal’ is based on contract law and it happens when the employer breaches the employment contract and forces the employee to leave and the claims for wrongful dismissal means looking at the employment contract to see if the employer has breached the contract. In the context of English industrial law, constructive dismissal would be the case of a wrongful dismissal. The term ‘unfair dismissal’, on the other hand, is based on statute when the employer dismisses the employee without reasonable excuse as in s. 20 of the Industrial Relations Act (1967). However, in the Malaysian context of industrial law, the term ‘wrongful dismissal’ and ‘unfair dismissal’ are synonymous and are used interchangeably (Thavarajah, 2008) and constructive dismissal is seen as another type of dismissal apart from wrongful dismissal and unfair dismissal. In determining constructive dismissal claims, it is the contract test and not the reasonable test, which must be present. The contract test was used in Wong Chee Hong v Cathay Organization (M) Sdn Bhd (also cited in Sama World Asia Sdn Bhd v Teo Soo Seng, 2008 1 ILR 112, IC) where the learned judge, Tun Salleh Abas, LP made the following comments: Thus it would be a dismissal if an employer is guilty of a breach which goes to the root of the contract or if he has evinced an intention no longer bound by it. In such situation, the employee is entitled to regard the contract as terminated and himself as being dismissed.

Similarly in the case of Shabudin Abdul Rashid v Talasco Insurance Sdn Bhd (2004), 4 CLJ 514 the Court of Appeal held that: We confirm this to be the true test as the employer’s conduct … must be such as to amount to there being a breach of some term in the appellant’s contract of employment and must be so fundamental as to evince an intention not bound by the contract of employment.

In Western Excavating (ECC) Ltd v Sharp (1978) 1 All ER 713, CA, which was an earlier English case, the decision was established that reference must be made to the contract of employment in order to see whether the employer’s conduct constitutes a fundamental breach of contract. This principal was also used in MPH Bookstores Sdn Bhd v Lim Jit Seng (1987) 1 ILR 585, IC (1987), that in order for a claim of constructive dismissal to be successful, both limbs of the common law ‘contract test’ must be present; they are as follows:

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Did the employer’s conduct amount to a breach of the contract or had he evinced an intention no longer to be bound by the contract thereby entitling the workman to resign, and did the workman make up his mind and act at the appropriate point in time soon after the conduct, which he had complained of, had taken place.

Therefore, the onus of proof is on the workman and not on the company to prove on a balance of probabilities that he/she was dismissed. The claimant has to prove that the company has breached the contract thereby entitling him/her to plead under constructive dismissal. In order to prove that he/she has suffered constructive dismissal, an employee must prove that he/she did so as a result of a breach of contract by his/her employer who no longer intends to be bound by the essential terms of the contract. The key element of constructive dismissal is that the workman must have been entitled to leave without notice as a result of the employer’s conduct. The word ‘entitled’ means that the employee could leave when the employer’s behaviour towards him/her was so unreasonable that he/she could not be expected to stay (Smith & Wood, 2007). Circumstances where the workman can classify when an employer’s action has led to constructive dismissal (D’Cruz, 2007) are: (1) arbitrary reduction of wages, commission, allowance, etc.; (2) withdrawal of contractual benefits provided as they are mentioned in the contract of service; (3) altering or taking away facilities reflective of the position; (4) demotion or downgrading to a lower post, with or without the reduction of salary, fringe benefits, etc.; (5) transfer to a different location if such transferability is not clearly stated in the letter of appointment; (6) substantial changes in the job function, especially if the employee is incapable of performing those functions; (7) behaviour by the employer, which is intended to humiliate the employee; (8) acts of victimization such as setting unattainable deadlines, constant fault-finding and harassment (including sexual harassment); and (9) threatening with dismissal if the employee does not resign from the job. Table 1 shows a drastic increase in the number of constructive dismissal awards made in 2009 which is the highest over the last seven years. A slight reduction in 2011 and 2012 as (reported) many of these cases which had been referred to the Industrial Relations department has resolved via conciliation. This is indeed alarming and it is a pressing issue that cannot be taken lightly by human resource practitioners in Malaysia. With

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Table 1.

Analysis of Awards of Termination Cases (2005
2012).

Types of Termination

2005

2006

2007

2008

2009

2010

2011

2012

Constructive Misconduct Retrenchment Others Total

22 2,144 16 0 2,182

42 2,051 32 0 2,125

97 1,200 422 402 2,121

126 878 155 573 1,732

140 613 114 328 1,195

135 608 67 479 1,289

91 639 90 640 1,460

96 540 62 735 1,433

Source: Malaysia Industrial Court, http://www.mp.gov.my/index.php/en/statistics/analysis-ofawards-of-dismissal-cases-2005
2011

compensation awarded to each employee amounted to as much as 24 months of back-pay salary plus a month’s pay for every year of service, organizations can no longer neglect this issue. Therefore, it is essential for human resource practitioners to learn and understand the cases on constructive dismissal in order to not only manage it but also to prevent constructive dismissal claims from taking place.

SOME OF THE CONSTRUCTIVE DISMISSAL AWARDS Transfer of a Workman The right to transfer a workman within the organization of an employer’s profession, business, trade or work is a managerial right; however that such transfer does not entail a change to the detriment of a workman in regard to his or her terms of employment. This law on transfer was also clearly summarized by Raus Sharif J in Chong Lee Fah v The New Straits Times Press (M) Bhd (2006) 1 MLJ 289, HC cited in Thavarajah (2008). In the earlier case of Supermix concrete (M) SdnBhd v Raduan Ahmad (2002) 1 ILR 80, IC, the claimant argued that a transfer to another plant was a breach of the fundamental contract. The judge held that in a transfer provision, the company had the discretionary power to transfer at any other location as and when the company required or needed; therefore, there was no mala fide or victimization; the company’s power to transfer the claimant in this case was a bona fide exercise. However in Dicklin Sdn Bhd v Bathma Subramaniam (1991) 2 ILR 750, IC, the court held that the transfer provision was only limited to a transfer from one selection, division or associated company to the other and that

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under the contract of service, the company had no contractual right to transfer the claimant from West Malaysia (Subang Jaya) to East Malaysia (Kota Kinabalu). The company’s action was mala fide given the fact that there was an on-going retrenchment exercise and knowing that the transfer will force her to resign, to avoid paying retrenchment benefits. In the case of Cosdel (Singapore) Pte Ltd v ChingChooi Ham (2002) 1 ILR 562, IC the claimant had verbally agreed to be transferred to another location assuming that the terms and conditions of the employment were similar to the current job. Upon receiving a new appointment letter with different terms, she agreed to accept the transfer provided that the terms and conditions of her employment were not changed. The court held that it was an unjust dismissal whereby the company had altered the terms and conditions of the employment. There were a few cases of constructive dismissal in the late 1990s which were related to transfers which are relevant for us explore further. In Funai Electric (Malaysia) Sdn Bhd Johor v Salliah Ahmad (1997) 2 ILR 1002, IC, the claimant, an assistant manager (shipping) claimed constructive dismissal on the ground that her transfer to the service parts department resulted in the erosion of her duties and responsibilities. She claimed constructive dismissal only after reporting to the new position and after being there for 12 days. The court allowed her claim of constructive dismissal notwithstanding the delay of 12 days on the ground that the claimant had to report to the new position as well as spend 12 days to find out whether it was indeed a demotion; this was not fatal to her claim. In Titan Polyethylene (M) SdnBhd v Othman Busu (1997) 3 ILR 497, IC, when the company demoted the claimant from the position of group human resource manager to assistant to the vice-president of human resource, he wrote to the managing director to reconsider his decision and to reinstate him in his former position. Pending the outcome of his appeal, the claimant worked under protest for 2.5 months before claiming constructive dismissal. He explained that the delay was there because he wanted to give the company a chance to remedy the breach. The court did not hold the delay as amounting to affirmation of the new terms of his contract. In Hotel Malaya Sdn Bhd v Say Lip Nyen (1994) 1 ILR 464, IC, the action of the hotel in transferring its maintenance executive to the newly created job of ‘car park executive’ without any indication of duties and functions was claimed by the claimant as both mala fide and a breach of contract. The court found that the claimant’s new job functions at the car park tantamounted to that of a car park attendant. It upheld the claim of

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constructive dismissal and rightly ordered for reinstatement to his former position in the maintenance department without any loss whatsoever. In Harta Maintenance Sdn Bhd v Vanaja Chelliah & Ors (1999) 1 ILR 639, IC, the claimants were cleaners at the Kajang Hospital and because of their trouble with their supervisor, they were transferred to the Kuala Lumpur Hospital. Though the right to transfer was the prerogative of the employer, it should not entail a change to the detriment of the employees. The claimants accepted the cleaner’s job in Kajang because the place of their work was just one block away from their homes. However, transfer was detrimental to the claimants as it caused them economic loss, an increase in travelling expenses and a decrease in their monthly income in terms of overtime income. The court upheld their claim of constructive dismissal and ordered compensation to be paid to the claimants. Therefore, it is pertinent for organizations to understand their legal right to transfer their employees as well as their limitations. This was highlighted by the Industrial Court in Kian Joo-South corp Sdn v Nurul Syafiqah Binti Abdullah (2003) 2 ILR 344, IC. In this case, the court cited Ghaiye’s Misconduct in Employment in respect to the power to transfer, which the learned author has emphasized, is subject to well-recognized restrictions namely: (1) there is nothing to the contrary in terms of employment; (2) the management has acted in a bona fide manner and in the interests of its business; (3) the management is not actuated by any indirect motive or any kind of mala-fide; (4) the transfer is not made for the purpose of harassing and victimising the workman; and (5) the transfer does not involve a change in the conditions of service. The above restrictions was also cited in the Court of Appeal by ArifinZakaria, JCA in Ladang Holyrood v Ayasamy a/l Manikam & Ors (2004) 3 MLJ 339, and Raus Sharif J in Chong Lee Fah v The New Straits Times Press (M) Bhd (2005) 4 CLJ 605 cited in Thavarajah (2008).

Setting Unreasonable Targets The assignment of work and the setting of work targets and performance goals are considered to be the right of organizations; however, under certain circumstances, this can lead to constructive dismissal if this right is

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not exercised in a bona fide manner. For example, in Informatics v George Varkey Sebastian (2002) 1 ILR 300, IC, the claimant contended that the company had set an unreasonable target and a re-designation. A contract test applied whereby the judge held that in a constructive dismissal claim, the onus is upon the claimant to establish on a balance of probabilities that the company by its conduct had breached a term or terms (express or implied) of the contract; that the breach is a fundamental one going to the root or foundation of the contract; that the claimant has terminated the contract by reason of the company’s conduct and the conduct is sufficiently serious to entitle the claimant to leave at once; and that the claimant in order to treat himself as discharged, left soon after the breach. Lasalle International Design School Sdn Bhd v Azhari Haltami (2002) 1 ILR 340, IC is an interesting case where the claimant, a lecturer, was unfairly dismissed when the company restructured the organization and also due to unsatisfactory work performance. The court held that where it concerned unsatisfactory performance, the company has to prove that the company has given sufficient warnings or notice to improve the employee’s quality of work, failing which, the employee could be asked to leave. During the process of restructuring, the management has the right to reduce the number of workmen in accordance to the company’s needs; however this exercise must be bona fide and genuinely undertaken. Since there was no evidence to prove that the claimant was given prior notice of retrenchment and warnings about his unsatisfactory performance, the dismissal was deemed unfair.

Unilateral of Changes in Contract It is well established in employment law that the employment terms and conditions cannot be varied unilaterally by one party. In Konnas Jet Cargo Systems SdnBhd v Cheah Cheong Tian (1995) 2 ILR 800, IC the claimant was a general manager of the company and a memo from the company dated 3 February 1987 unilaterally altered his duties and responsibilities and also made him subservient to an assistant general manager brought in from the parent company. The breach of contract as alleged occurred on 3 February 1987 but the claimant only left his employment on 6 July 1987, more than five months later. Since the company insidiously committed a series of breaches which were inconsistent and incompatible with the claimant’s functions, duties, status and dignity as a general manager of the

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company only after its letter dated 3 February 1987, the court ruled that the delay was not fatal. In Sugar Bun Services Corp Bhd v Ong Siew Choon (2006) 1 ILR 99, IC, the employee’s fixed annual bonus was an express term in the employee’s annual remuneration and as such, it was a fundamental term of the contract between the two parties. The company therefore could not unilaterally withdraw the said fixed annual bonus without the employee’s consent. The company’s action amounted to a serious breach of the claimant’s contract of employment.

Payment of Wages In the case of ATI Technologies (M) Sdn Bhd & Anor v Jamilah Abu Bakar (2002) 1 ILR 385, IC, the claimant constructively dismissed herself when she was not paid monthly salary. The court held this as unjust dismissal and ordered the claimant to be paid back wages and compensation in lieu of reinstatement. In TKS Kitcheneering Studio (SA) SdnBhd v Chia MooiKeng (2002) 1 ILR 124, IC, the company had constructively dismissed the claimant via her demotion and the drastic salary reduction without providing her with any reasons. In Broadway Typesetting Sdn Bhd v Puan Ho Nyet Khoon (1987) 2 ILR 350, IC, the claimant was dismissed because she was 4½ months pregnant. The court held that the company had avoided paying her maternity leave and had therefore found that there was no just cause or excuse to dismiss the claimant. In Sama World Asia Sdn Bhd v Teo Soo Seng (2008) 1 ILR 112, IC, cited in Thavarajah (2008), the employee claimed constructive dismissal when the company did not pay his salary, income tax and EPF (Employee Provident Fund) for three months as well as his reimbursements for travelling and medical expenses. The Industrial Court however dismissed the employee’s claim, holding that the employee had failed to prove that the company had evinced an intention not to be bound by the contract.

Repudiation of Contract In Plastic Tecnic Sdn Bhd v Saraswathy d/o Manickam & Ors (1991) 1 ILR 643, IC, the company relocated itself from Petaling Jaya to Bangi promising its employees that a free transport service would be continuously provided. However, the bus service ceased operations after two months. The

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conduct of the company in ceasing operations was held to be a repudiation of a fundamental term of the contract, and the employees were therefore, entitled to regard themselves as having been constructively dismissed. Breach of Implied Term The terms and conditions of employment are both expressed (written) and implied (not written or psychological contact). There were several cases of breach of implied contact in the 1990s which lead to constructive dismissal. For example in Aik Poh Rubber Industries Sdn Bhd v Goh Seng Hooi (1991) 2 ILR 849a, IC, the court applied the common law principle that the company by humiliating, intimidating and assaulting the claimant which made him fear for his safety was guilty of breach of an implied term which goes to the root of the contract of employment. This is therefore dismissal. In another award provided by the court in Multrapac Sdn Bhd v Low Kok Piew (1993) 2 ILR 242, IC, the court held that no employer has the right to assault his/her employee for any reason. Therefore, the claimant had the right to walk out after the assault and treated himself as being dismissed by the company. While in the case of Syarikat Pengurusan Ladang Sdn Bhd v Sebastian Joseph Fernandez (1991) 1 ILR 99a, IC, the Industrial Court held that when the conduct of an employer is outrageous and makes continued employment impossible for a workman, he/she need not tolerate it and can treat himself or herself as dismissed.

Back Wages and Compensation for Constructive Dismissal Section 20(1) of the Industrial Relations Act (1967) provides employment protection for workmen. The Section provides: Where a workman, irrespective of whether he is a member of a trade union of workmen or otherwise, considers that he has been dismissed without just cause or excuse by his employer, he may make representations in writing to the Director General to be reinstated in his former employment; the representations may be filed at the office of the Director General nearest to the place of employment from which the workman was dismissed.

As for the back wages and compensation for constructive dismissal, there is no set formula to be followed. In Holiday Inn Kuching v Lee Chai Siok Elizabeth (1992) 1 MLJ 230, HC, the claimant found employment after her dismissal, therefore requested for compensation in lieu of reinstatement.

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The court held that the claimant did not want the job back, thus there is no basis for awarding damages or compensation in lieu of reinstatement. Lately, there have been delays in obtaining a hearing date and this creates considerable problems to claimants who seek reinstatements. Thus under such circumstances, back wages or compensation in lieu of reinstatements will be the only remedy provided by the ordinary court for wrongful dismissal. In Sibu Steel (Sarawak) Sdn Bhd v Ahmad TermizeBujang (1996) 2 ILR 885, IC, the social objective of s. 20 of the Industrial Relations Act (1967) was pointed out by the court as follows: The remedies of reinstatement or compensation in lieu thereof are consequential to the substantive right conferred upon workmen of their entitlement to security to tenure which is translated into the practical assurance that no employer can dismiss or even contractually terminate the service of his employee without just cause or excuse. … the complaint of unjust dismissal solely on the ground that the remedy of reinstatement is no longer expedient or otherwise inappropriate.

Establishing Constructive Dismissal In Ang BengTeik v Pan Global Teitiles (1996) 3 MLJ 137, CA, where Tun Salleh AbasLP had observed that in proving constructive dismissal, the claimant has to establish: (1) that the company, by its conduct had breached the contract of employment in respect of one or more of the essential terms of the contract; (2) that the beach is a fundamental one going to the root or foundation of the contract; (3) that the claimant had terminated the contract by reason of the company’s conduct and that the conduct is sufficiently serious to entitle the claimant to leave at one; and (4) that the claimant, in order to assert the right to treat himself as discharged, left soon after the breach. He further commented that when the claim for reinstatement under s. 20(1) of the Industrial Relations Act (1967) is based on constructive and not actual dismissal, the onus of proving that he has been constructively dismissed lies on the workman himself. Therefore if the workman leaves the company where these conditions are not met, he may be considered as having resigned. The evidence of the employer’s conduct and the events determine whether the claimants have been dismissed or constructively dismissed by

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the company. DatoGopal Sri Ram JCA in Ang BengTeik v Pan Global Textile Bhd (1996) 3 MLJ 137, CA, said that ‘the term “constructive dismissal” is only a convenient label to describe the conduct on the part on the employer which makes a workman consider that he has been dismissed without just cause or excuse, although there is no formal order of dismissal’.

Some Recommendations to Reduce Constructive Dismissal Cases Thavarajah (2008) asserted that under the broad concept of ‘constructive dismissal’, the courts are imposing further responsibilities on organizations and employers. Therefore, employers whether domestic or multinational would have to shoulder greater responsibility towards their employees. For example, an employer who ignores a complaint by a female employee that she has been sexually harassed may have to defend his/her inaction before the Industrial Court pursuant to a complaint by the female employee that she had been constructively dismissed. With the increasing claims on constructive dismissal, the management of human resources becomes more challenging with legal implications for organizations and employers. As a result, from the perspectives of the author, the following recommendations and suggestions can be a useful guide to reduce claims of constructive dismissal. These recommendations are not difficult to implement as they are simple strategies based on the human dimension of management. These include the creation of harmonious employment relations, a consultative management approach, effective and efficient grievance handling machinery and effective human resource strategies (Muniapan, 2006, 2010, 2013). These recommendations are also useful for the effective management of employment in any industry, society or country. The creation of harmonious employment relations is essential. Employees are considered as the most important resource of the organization because they contribute to the growth and success of the organization. Like any other resource in the organization, they would need to be managed; but unlike any other physical resource, employees are human beings that have feelings, freedom of thoughts and freedom to make choices, the liberty to act, or not to act, in a certain manner, etc. Because employees are considered as a unique and vital organizational resource, they would need to be managed properly. Industrial relations or employment relations essentially are ‘human relations’ and understanding the ‘humane’ and ‘human’

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aspect of management is the first step in creating harmonious employment relations. The constructive dismissal cases that were highlighted earlier indicate poor human management and are one of the sources of the claims made by employees. Therefore, the organizations would need to play a strategic role in creating and maintaining harmonious employment relations. Moreover, both employers and employees should regard each other as partners to build lasting relationships. They would need to adopt a consultative approach in resolving issues through dialogue, taking into consideration the needs and concerns of both parties. The employers or the management should also provide effective leadership and direction in the overall interests of all parties. They should lead by example and accept responsibilities. The employers should adopt a more participative management style, participative management style is more suitable to the current management environment in Malaysia as several research studies indicate that the authoritarian or directive management styles is not suitable for many organizations in the current business environment. Participative management is an open form of management where employees have a strong decision-making role. A participative management system needs to be developed by the management especially in a non-unionized environment to actively seek a strong cooperative relationship with their employees. Besides reducing the constructive dismissal claims, the advantages of participative management include increased productivity, improved quality and reduced costs. The handling of employee grievance with an effective grievance handling machinery is a must to resolve any disputes at supervisory level. A grievance is like a small fire; the earlier you put it out, the better. The grievance should be studied thoroughly and objectively, and due consideration should be given to the social and cultural aspects of the grievance and the parties involved. The grievance handling procedure of the organization can affect the harmonious environment of the organization. The grievances of the employees are related to the contract, work rules, policy or procedure, health and safety regulation, individual complaints, wage, bonus and other employment related issues. Here, the attitude on the part of the organizations in their effort to understand the problems of employees and to resolve the issues amicably have a better probability in maintaining a culture of high performance (Kumar, 2006). The grievance handling process must be done in a fair and equitable solution for all parties, both the employer and employees. The solution should be just (firm), but justice should be tempered with compassion wherever possible. Finally, the solution to the

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grievance should not only be effective in redressing the present grievance but it should also be effective in avoiding recurrence of such grievances in the future (D’Cruz, 1999). Therefore, organizations need to educate their managers about the importance of the grievance procedures as the effective grievance handling is an essential part of cultivating good employee relations and running a fair, successful and productive workplace. Effective human resource management and employment relations strategies in terms of employee selection, induction, training and development, performance management and appraisal, compensation management and employee relations are also essential. As previously stated employers should regard their employees as their most important asset as it is not great products or services that make an organization great but the people. Investment in their employees and developing them is also a must for the organizations to remain competitive in the marketplace. Every manager manages employment relations, although not every manager is an employment relations manager in the organization. As the current expectation on human resources is shifting from managing the organization of the business to managing the business of the organization (Yong, 2005), it is essential for organizations operating in Malaysia to manage their human resources effectively.

CONCLUSION Constructive dismissal claims and cases are creating new challenges in human resource management and it is indeed one of the important and emerging patterns of employment relations in Malaysia. The cases of constructive dismissal provided and the recommendations will be a helpful guide to organizations and human resource practitioners in Malaysia to prevent constructive dismissal claims from being practiced in their respective organizations. They will also be able to avoid some of the common mistakes as found from the analysis of the case laws related to constructive dismissal. Thus this will help in reducing the number of claims and cases of constructive dismissal which will be referred to the Ministry of Human Resources under s. 20 of the Industrial Relations Act (1967). With a good understanding of the awards on constructive dismissals, it is expected that organizations will manage and treat their human resources as their greatest assets and prevent claims of constructive dismissals from taking place. This will eventually help to improve and maintain harmonious employment

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relations and directly comply with the UN Global Compact’s sixth principle of labour standard on elimination of discrimination in employment and occupation with the context of Malaysian labour relations.

NOTES 1. The term workman is different from term ‘employee’ as defined in the Employment Act (1955). Employee as defined in the Employment Act, s. 2(1) as any person, irrespective of his occupation, who has entered into a contract of service with an employer under which such person’s wages do not exceed Ringgit Malaysia two thousand (RM 2000.00). In the Industrial Relations Act (1967), the term ‘workman’ is defined as ‘any person, including an apprentice, employed by an employer under a contract of employment to work for hire or reward and for the purposes of any proceedings in relation to a trade dispute …’ In this chapter, both the terms ‘employee’ and ‘workman’ are used interchangeably depending on the context of statutes applied (Employment Act and Industrial Relations Act). 2. The Federal Constitution of Malaysia is the supreme law of the country. Article 5(1) provides that no person may be deprived of life or personal liberty save in accordance with law. 3. Article 8(1) provides that all persons are equal before the law and entitled to its equal protection. However in practice, this can be debated as in the case of art 8(2) which allows no discrimination against any citizens on the grounds of religion, race, descent or place of birth. 4. The concept of natural justice has two basic components: (1) the rules of audialterampartem and (2) the rule against bias. The rule of audialterampartem or the rule requiring a fair hearing is of importance and can be used to construe a whole code of administrative procedural rights. The rule against bias is also of equal importance for a man should not be judged in his own cause and justice must not be done but seen to be done. An adjudicator should not be a party to the dispute if he has some interest therein and it is not necessary to prove that a particular decision made by the adjudicator was in fact influenced by biasness. It is sufficient if there is a reasonable suspicion about his fairness. He must not only be free from biasness, but there must not even be an appearance of biasness (Eastern Plantation Agency (Johore) SdnBhd v Association of West Malaysian Plantation Executives, Seremban, 1985). 5. Section 20(1)
‘Where a workman, irrespective of whether he is a member of a trade union of workmen or otherwise, considers that he has been dismissed without just cause or excuse by his employer, he may make representations in writing to the Director General to be reinstated in his former employment; the representation may be filed at the office of the Director General nearest to the place of employment from which the workman was dismissed’. The Industrial Court in PG Pak Poy & Associates Sdn Bhd v Looi Sook Chan (1986) asserted that: ‘Section 20 of the IRA embodies the concept of security of tenure of employment … a workman is entitled to keep his job and no employer may be allowed to throw a workman out of his employment without good reason. This provision gives a workman the right to

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claim reinstatement and this court may order reinstatement in the workman’s former employment if his dismissal is considered to be without just cause or excuse’.

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Industrial Court (Malaysia) Award 20/1997. Industrial Relations Act. (1967). (Malaysia). Informatics v George Varkey Sebastian. (2002). 1 ILR 300. International Labour Organization Convention No 158 of (1982) article 4 of the Convention Concerning Termination of Employment at the Initiative of the Employer. Kian Joo-South corp Sdn v Nurul Syafiqah Binti Abdullah. (2003). 2 ILR 344. Kiong, H. S. (2002). Dismissal salient points to ponder before industrial court proceedings in Malaysia. Kuala Lumpur: Leeds Publications. Konnas Jet Cargo Systems SdnBhd v Cheah Cheong Tian. (1995). 2 ILR 800. Kuching Plywood Bhd v Ng Tiong Hie. (1994). Industrial Court Award 172, 1994. Kumar, D. M. (2006). Grievance handling: Precautions and prescriptions to HR managers. Retrieved from http://www.indianmba.com/Faculty_Column/FC338/fc338.html Ladang Holyrood v Ayasamy a/l Manikam & Ors. (2004). 3 MLJ 339. Lasalle International Design School Sdn Bhd v Azhari Haltami. (2002). 1 ILR 340. Lim Sim Tiong v Palm Beach Hotel. (1974). Industrial Court Award 48 of 1974. Lotteries Corporation (Sabah) Sdn Bhd v Vincent Lee. (1991). Industrial Court Award 159. Milan Auto Sdn. Bhd. v. Wong She Yen (1995). 4 Current Law Journal 449. Mohamad, L. S. (2006). Q & A on labour laws in Malaysia. Petaling Jaya: Sweet & Maxwell Asia. MPH Bookstores Sdn Bhd v Lim Jit Seng. (1987). 1 ILR 585. Multrapac Sdn Bhd v Low Kok Piew. (1993). 2 ILR 242, (1991) Industrial Court Award No. 13 of 1991. Muniapan, B. (2006). Work and employee relations: An overview of constructive dismissal in Malaysian employment relations. 3rd National Human Resource Management conference, City Bayview Hotel, Langkawi, 26
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Quah Swee Khoon v Sime Darby Bhd. (2000). 2 MLJ 600. Ramasamy, G. (2006). Discipline at work: A guide for managers. Kuala Lumpur: Industrial Relations Network. Sama World Asia Sdn Bhd v Teo Soo Seng. (2008). 1 ILR 112. Shabudin Abdul Rashid v Talasco Insurance Sdn Bhd. (2004). 4 CLJ 514. Sibu Steel (Sarawak) Sdn Bhd v Ahmad TermizeBujang. (1996). 2 ILR 885. Smith, I. T., & Wood, J. C. (2007). Industrial law (9th ed.). London: Butterworths. Stamford Executive Center v Dharsini Ganesan. (1985). 1 ILR 101, Industrial Court Award 263 of 1985. Sugar Bun Services Corp Bhd v Ong Siew Choon. (2006). 1 ILR 99. Supermix concrete (M) SdnBhd v Raduan Ahmad. (2002). 1 ILR 80. Syarikat Pengurusan Ladang Sdn Bhd v Sebastian Joseph Fernandez. (1991). 1 ILR 99a, Industrial Court Award No 27/1991. Thavarajah, T. (2008). Constructive dismissal: Commentaries and cases. Kuala Lumpur: CCH Asia. Thavarajah, T., & Low, T. C. (2003). Employment termination law & practice in Malaysia. Singapore: CCH Asia Pte Limited. Titan Polyethylene (M) SdnBhd v Othman Busu. (1997). 3 ILR 497. TKS Kitcheneering Studio (SA) SdnBhd v Chia MooiKeng. (2002). 1 ILR 124. Western Excavating (ECC) Ltd v Sharp. (1978). ICR 221. Wong Chee Hong v Cathay Organization (M) Sdn Bhd. (1988). 1 CLJ 45. Wu, M. A. (1995). The industrial relations law of Malaysia. Kuala Lumpur: Longman. Yong, K. B. (2005). Strategic HR: Invent and innovate. Kuala Lumpur: Genuine Circuit.

WEBSITES http://www.unglobalcompact.org http://www.ilo.org/

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ABOUT THE AUTHORS Carlos Ota´vio de Almeida Afonso is an Internal Auditor at National Institute of Metrology, Quality and Technology (Inmetro), PhD in Economic Science at Institute of Economics of National University of La Matanza, Master in Management and Strategy at Federal Rural University of Rio de Janeiro (UFRRJ), Bachelor in Marketing Management. Has experience in Education, focusing on Educational Administration, acting on the following subjects: management process, planning, organization, leadership, control, auditing, public administration, organizational models, social management, smart mobs, common goods, cooperation, and public goods. Olawale Ajai (LLM; PhD Law (Ife)) is a Legal Practitioner of the Supreme Court of Nigeria. He was Senior Lecturer, Faculty of Law, Obafemi Awolowo University, Ile-Ife and Assistant Research Professor/Acting Director of Research at the Nigerian Institute of Advanced Legal Studies, Akoka, Lagos. He held successive roles as: Group Company Secretary/ Legal Adviser; Executive Director, Human Capital and Legal; and Executive Director, Marketing and Strategy at Dunlop Nigeria Plc. Currently, he is a Professor of Legal, Social and Political Environment of Business at the Lagos Business School, Pan Atlantic University, Lagos. He is an alumnus of Lagos Business School, IESE Business School and Harvard Kennedy School of Government. He is a Member of the following associations: IUCN World Commission on Environmental Law; Chartered Institute of Taxation of Nigeria; Institute of Directors; Associate Member, Chartered Institute of Personnel Management of Nigeria and Fellow, LEAD International Inc. Agyenim Boateng is Professor of Finance & Banking, Department of Finance, Accounting & Risk, Glasgow Caledonian University, UK. He received his PhD in Economics Studies from the University of Leeds, UK. His current research interests include mergers and acquisitions, firm performance and the risk taking behaviour of banks. He has published in a number of international journals including Journal of International Financial Markets, Institutions and Money, International Journal of Accounting, 317

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International Review of Financial Analysis, Review of Quantitative Finance & Accounting and International Business Review. Email: [email protected] Maria Alejandra Calle is an Associate Professor at Universidad EAFIT in Colombia. She studied a PhD at the Faculty of Law, University College Cork (National University of Ireland) under the supervision of Dr. Owen McIntyre. Her areas of research are focused on International Trade Law and the Environment. Maria Alejandra holds a Master in International Economic Law and Policy from the Universidad de Barcelona (Spain) and a Master in Administration Sciences from Universidad EAFIT (Colombia). Maria Alejandra obtained her LLB at Universidad de Medellin (Colombia). In 2010 and 2012 she was a research fellow at the United Nations Conference on Trade and Development UNCTAD (Switzerland). Email: [email protected] Ricardo Vinhaes Maluf Cavalcante (Bachelor in Law) is an Assistant in Management at Federal University of Maranha˜o (UFMA). Has experience in International Law, focusing on World Trade Organization (WTO) and International Relations, acting on Public Administration with emphasis on Research and Postgraduate. Uchenna R. Efobi is a PhD student in the School of Business, Covenant University, Nigeria. He is a qualified Chartered Accountant of the Institute of Chartered Accountants of Nigeria (ICAN). His research focus is on Institutions, International and Development Economics. He has won some research awards and grants, which include: Global Trade Alert and African Centre for Economic Transformation joint award for commissioned paper on Contemporary Protectionism (2012), First Place position in the FLACSO-WTO Award, 2012 edition, and he is an Alumni of the Brown International Advanced Research Institutes. He has publications in referred journals and book chapters including the South African Journal of Economics
SAJE, Journal of Economic Policy and Planning, African Development Bank Working Paper Series, Journal of Economic Cooperation and Development. Contact/Email address: Department of Accounting, School of Business, Covenant University, Ota, Ogun State, Nigeria/ [email protected]; [email protected]. Dinorah Frutos-Bencze (PhD, MBA, MS) is an Assistant Professor of International Business at Saint Anselm College in Manchester, NH, USA. Dr. Frutos-Bencze has over 9 years of professional experience as Human Resources Manager and Training and Development Manager in Europe

About the Authors

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and the United States. In addition, to corporate experience, Dr. FrutosBencze was the Associate Dean of Online Business Programs at Southern New Hampshire University-COCE for two years. Dr. Frutos-Bencze is fluent in English, Spanish and Czech. Dr. Frutos-Bencze received her MS in Chemistry at the University of New Mexico, MBA at Oxford Brookes, UK, and her PhD in International Business at Southern New Hampshire University. Her most recent research has been focused on economic integration (specifically in the CAFTA-DR region). Other research interests are the application of system dynamics modeling to international business, as well as the impacts of international business on environmental sustainability. Email: [email protected] Maria Alejandra Gonzalez-Perez (PhD, MBS, Psy) is Full Professor of Management at Universidad EAFIT (Colombia). Maria-Alejandra is the coordinator of the Colombian universities in the virtual institute of the United Nations Conference for Trade and Development (UNCTAD), Distinguished Fellow of the Association of Certified Commercial Diplomats, and Editor-in-Chief of the business journal AD-minister. Dr. Gonzalez-Perez holds a PhD in International Business and Corporate Social Responsibility, and a Master’s degree in Business Studies in Industrial Relations and Human Resources Management from the National University of Ireland, Galway. She also did postdoctoral research at the Community Knowledge Initiative (CKI) in NUI Galway. Prof. Gonzalez-Perez is the past Head of the Department of International Business (2009
2013) and former Director of the International Studies Research Group (2008
2013) at Universidad EAFIT (Colombia). Email: [email protected] Xiuping Hua is Assistant Professor of Finance, Nottingham University Business School, the University of Nottingham, China. She received her PhD from the University of Sheffield, UK. Her research interests revolve around option returns and volatility, China’s economic policy, financial markets and international finance. She has published in the leading international journals including European Journal of Finance, Economic Modelling and Research in International Business & Finance. Email: [email protected] Annie Lamontagne is Canadian, naturalized Brazilian in 2014. She completed her PhD at the Center for Research and Graduate Studies on the Americas of the University of Brasilia (2011
2015). She obtained her

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Masters in the same program (2010). She graduated in Political Science (major) and Communication (minor) from the University of Ottawa (1996). Her professional experience includes training and coordination work in human rights NGOs and teaching in the Czech Republic, Belgium and Brazil. Her main areas of interest are corporate social responsibility, the impacts of social and environmental licensing, human rights training, and interethnic conflicts management. Email: annie.lamon [email protected] Liam Leonard (BA, MPhil, PhD) is Lecturer in Sociology & Criminal Justice, California State University, Fullerton, USA. He is the former President of the Sociology Association of Ireland. He was the senior academic and taught modules on Human Rights, Sociology, Criminology, Professional Development and Equality & Diversity on the Irish National Prison Officer Training Programme. He is the author/editor of over 15 books and numerous journal articles, Senior Editor of the Ecopolitics Books Series, the Advances in Sustainability and Environmental Justice Book Series (both with Emerald UK) and Founding Editor of CRIMSOC Journal of Social Criminology. Dr. Leonard has edited the 2011 Irish issue of the Prison Journal, as well as special issues of Environmental Politics and the Irish Journal of Sociology and the Criminology issue of the Irish Journal of Applied Social Studies. Dr. Leonard was awarded the Sage Publishing Research Excellence Award in New York as well as the Irish NAIRTL Research & Teaching Award in 2012, and has ten years’ experience as an academic and lecturer in the National University of Ireland and the Institute of Technology sector. Now resident in Orange County, California, he is an Adjunct Associate Professor with the Department of Sociology & Anthropology at West Virginia University and a Research Fellow with WVU’s Center for the Study of Violence and Conflict Resolution. Email: [email protected] John McNally is currently completing a PhD under Dr. Owen McIntyre at the Faculty of Law/Environmental Research Institute at University College Cork (UCC, National University of Ireland). His main research interests include environmental law, intellectual property law, EU law, Global Administrative Law, international customs & excise law and competition law. His LLM covered “The Use of Information Technology to Provide a Better Standard of Health Care; Telemedicine, Malpractice and Product Liability” and he has also assisted with the formulation of various international customs codes. He currently holds the position of assistant lecturer in UCC and occasionally delivers guest modules on European Union Law

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at Cˇeska´ Zemeˇ deˇ lska´ Univerzita (CZU, Czech University of Life Sciences) in Prague, Czech Republic. The author’s corresponding email address is [email protected] Balakrishnan Muniapan is currently a senior academic, trainer and consultant in Human Resource Management (HRM) from Penang, Malaysia. He has conducted trainings and consulted more than 100 organisations in Malaysia and in Asia. In academia, he has published over 50 research papers in international journals, conference proceedings and book chapters. A highly sought-after speaker in HRM, Dr Bala is frequently invited to speak on HRM issues at international conferences in countries in Asia, Australia, Africa and Europe. Prior to academia, he was in production management with a large Japanese manufacturing company at his hometown in Sungai Petani, Kedah. Email: [email protected] Stephen O. Oluwatobi is a PhD student in Economics department in the School of Social Sciences, Covenant University, Nigeria. His research interest is in the areas of human capital development, innovation economics and knowledge economy. His current research is centred on Knowledge Economy and Economic Development in Sub-Saharan Africa. Stephen has been involved in OIKOS Scholars Economics Academy. He has published in a number of reputable journals. Besides his research work, he teaches Labour Economics, Managerial Economics and Industrial Economics. He is also involved in community development endeavors as well as contributions to development initiatives. He has served in various committees that cover entrepreneurship development, Awards and Endowments and hosting of two Nobel Prize winners in Economics. He is currently the Director of the iFund Initiatives in Nigeria aimed at promoting the culture of innovation among University students. His contact details are as follows: Economics and Development Studies Department, Covenant University, Canaanland, Ota, Ogun State, Nigeria. Email: stephen.oluwatobi@cove nantuniversity.edu.ng Santiago Sosa (MIB) has held positions as adjunct lecturer at Universidad EAFIT (Colombia) and member of the International Studies Research Group at the same university. His areas of interest include international relations, conflict studies, globalization and political economy. He has published papers on Colombia’s foreign policy, Colombian civil wars, South American regional security and UN interventions. He is currently pursuing a PhD in Political Science at Rice University in the United States. Email: [email protected]

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Sylwia E. Starnawska (PhD, MBA) joined the MBA team of School for Graduate Studies of SUNY Empire State College as an Assistant Professor from D’Youville College, Buffalo, NY. She also held academic positions at: University of Podlasie (Poland), Central Piedmont Community College and University of Phoenix (North Carolina). She was a Coordinator of the Bologna Process for creation of the European Higher Education Area. Dr. Starnawska has over 10 years of successful international business experience in management of financial institutions, mainly MNCs. She was involved in international corporate finance, global capital markets and international investments. She served for CNBC as a guest speaker and a professional marketing face from London (England). Dr. Starnawska also holds Investment Management Certificate required in the UK to manage global mutual funds. She serves as an active reviewer for economics textbooks, and academic papers and research for international conferences of the Academy of the International Business, and is a member of the American Economic Association (AEA), the American Finance Association (AFA), and the Financial Management Association (FMA). Her recent papers and contributions were published in: Journal of Index Investing, The Encyclopedia of Emerging Markets, Journal of American Business Review, and co-editorial of the book on Competitive and cooperative business strategies for efficient outcomes in different markets Email: [email protected]