Journal of Environmental Management 144 (2014) 286e296

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International certification in developing countries: The role of internal and external institutional pressure Mahelet G. Fikru* Department of Economics, Missouri University of Science and Technology, 500 W 13th St., Rolla, MO 65409, USA

a r t i c l e i n f o

a b s t r a c t

Article history: Received 22 November 2013 Received in revised form 16 May 2014 Accepted 26 May 2014 Available online 27 June 2014

This paper examines the different internal and external institutional factors that affect the decision of businesses in developing countries to adopt international certification (IC). Past studies focus on pressure from international laws, the role of multinationals, and businesses mimicking practices of their counterparts in developed countries. This paper finds that, in addition to these external factors, internal factors may have a significant role. Even though environmental regulation is weak in developing countries, governments do not ignore industrial pollution and casualties. They respond by increasing bureaucratic regulations for businesses and this can affect the decision to adopt IC. Furthermore, internal pressure may come from workers' unions that push for a safe and healthy working environment. Published by Elsevier Ltd.

JEL classification: L1 O44 Q56 Keywords: Bureaucratic requirements Industrial pollution ISO 14001 Environmental management practices Environmental regulation

1. Introduction Most developing countries have a poor environmental regulatory framework. Effective environmental policies are often not in place due to lack of funds, trained personnel, public infrastructure and, in some cases, political will. Even in countries where policies are in place, compliance is low due to lack of enforcement. Other non-regulatory channels such as pressure from consumers, capital market and environmental activists are ineffective due to credible backup from actual regulation (Blackman, 2008, 2010). Initiatives that address waste management, clean urban environment, inspections and legal measures on violators remain inadequate to implement environmental regulations largely. Thus, as Esty and Porter (2001) suggest the weak environmental regulatory system and enforcement mechanism is one of the main factors for poor environmental performance in most developing countries (Dasgupta et al., 1995).

* Tel.: þ1 011 574 341 6495. E-mail addresses: fi[email protected], [email protected]. http://dx.doi.org/10.1016/j.jenvman.2014.05.030 0301-4797/Published by Elsevier Ltd.

Despite weak environmental regulation there is some evidence that businesses in developing countries undertake voluntary measures to adopt standards that create, structure and implement verifiable processes aimed at quality improvement and environmental impact (Blackman, 2008). Managers participate in programs, initiatives or agreements that distinguish them as having environmental commitment. They engage in environmental management practices by reducing environmental impact, environmental reporting and considering environment in business plans (Baughn et al., 2007; Hassan and Ibrahim, 2011). Christmann and Taylor (2001) find evidence of self-regulation of environmental performance in China. Blackman (2008) and Blackman et al. (2010) study voluntary environmental regulation in Mexico and India. Pargal and Wheeler (1995) discuss how educated and affluent communities create informal regulations to control pollution in Indonesia. Blackman et al. (2012) discuss voluntary environmental agreements in Colombia. Zhu et al. (2012) use a survey of 377 Chinese manufacturing enterprises to show that about 45% of Chinese plants adopt environmentally proactive organizational routines at a voluntary basis. Using a similar method, Liu et al. (2010) find that about 70% of Chinese enterprises are willing to disclose information about environmental goals and action plans.

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Percentage of private businesses with IC (%)

Roht-Arriaza (1997) studies the acceptance of international environmental standards among 18 member states of the Asia Pacific Economic Corporation. The most common voluntary environmental practice is the adoption of internationally recognized certification. International Certifications (henceforth ICs) are voluntary management practices that set international standards to address social and environmental issues. When a business achieves an IC, it commits to comply with the chosen standard with the possibility of audit by a third party. There are different types of ICs the most common of which are issued by the International Organization for Standardization (ISO) which is one of the largest global developers of standards. Among others the ISO issues ISO 9001 for quality management system, ISO 14001 for environmental management system, ISO 26000 for corporate social responsibility, ISO 31000 for risk management, ISO 27001 for information security management and ISO 50000 for energy management. Other industry specific ICs are also popular in developing countries. For example, Global Good Agricultural Practice for fresh food products, American Association of Textile Chemists and Colorists (AATCC) for textiles, Hazard Analysis and Critical Control Point (HACCP) and ISO 22000 for businesses in the food chain, Forest Stewardship Council (FSC) for forest management, etc. The two most successfully diffused ICs are ISO 9001 and ISO 14001 (Viadiu et al., 2006). Even though they are different in their focus, they both provide rules to guide the creation of a management system and involve significant cost to businesses (Potoski and Prakash, 2005). Fig. 1 shows the percentage of private businesses with an IC for 90 developing countries. The figure indicates that lower-middle income countries do better than very poor countries in terms of certifying their businesses. On average, about 16% of plants certified their businesses in the sample countries with a range from 0% in Syria to over 43% in Chad. Given deficient environmental regulatory framework in most developing countries, what drives participation in voluntary environmental management practices? Furthermore, given the substantial cost of adopting IC, why do businesses in developing countries adopt them? Several studies examine the effect of globalization and international trade on the adoption of voluntary environmental practices in developing countries. Wu et al. (2007) show that exportoriented Taiwanese firms are more likely to adopt ISO 14001

287

than local-oriented plants. In Cameroon businesses adopted environmental management systems to compete internationally (Alemagi et al., 2006), in Ghana internationally connected businesses have improved their environmental management practices (Ofori and Hinson, 2007), in Kenya the cut-flower industry implemented environmentally safe practices to meet European standards (Dolan and Opondo, 2005), and in Nigeria small business leaders reported that globalization is the main driving force for adopting socially responsible practices (Amaeshi et al., 2006; Ngwakwe, 2009). In Mexico, larger plants trading in overseas markets are most likely to join voluntary regulatory initiatives (Blackman, 2012). Corbett and Kirsch (2001) argue that firms in developing countries adopt ISO 14001 in fear of exclusion from export markets. Oliveira et al. (2010) find evidence that ISO 14001 contributes to the start and expansion of exports in Brazil. In addition, big multinationals encourage their subsidiaries as well as suppliers in developing countries to be certified (Christmann and Taylor, 2001; Zhu et al., 2012). Previous studies examine determinants of IC using either data obtained from a specific country with no cross-country comparison (Zhu et al., 2012) or aggregate country-level data (Neumayer and Perkins, 2005; Delmas and Montiel, 2008; Guler et al., 2002). The general consensus is that firms in developing countries adopt IC as a response to external factors. This study uses plant-level data obtained from 35 developing countries to study firm-level determinants of IC in developing countries. We apply institutional theory to explain why businesses adopt IC and find that institutional pressure comes from external as well as domestic sources. Like previous studies, we find evidence that exporting plants, foreign-owned plants and internationally connected plants are more likely to adopt IC. Furthermore, we find evidence that pressure from factors within the country can affect adoption of IC. We argue that industrial pollution as well as industrial pollution casualties causes governments in developing countries to develop a bureaucratic regime where businesses are required to fulfill several requirements. Faced with such red tape businesses adopt IC as a way to legitimize themselves and possibly prevent future bureaucratic regulations. Another internal pressure comes from workers' unions that push for a healthy and safe working environment. We also find evidence that certification clusters in the electronics and auto and auto-parts industries. This may occur when plants in these

50 45 40 35

R² = 0.9404

30 25 20 15 10 5 0 0

20

40

60

80

100

120

140

160

180

200

GDP per capita $ ('100) Fig. 1. International certification in developing countries. Source: Author's calculation based on World Development Indicators and Enterprise Surveys, The World Bank (http:// www.enterprisesurveys.org/). The x-axis represents average GDP per capita for years 2009 and 2010, measured in constant 2005 US dollars. The y-axis represents percentage of private businesses with internationally-recognized quality certification such as ISO 9001 and ISO 14001 (data available either for 2009 or 2010 but not both years) and the values are based on sample drawn from the manufacturing sector only.

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sectors decide to certify by mimicking early adopters and hence creating a new norm in the industry. Section 2 provides the theoretical background for the hypotheses developed in this study. Section 3 presents data and methodology; and discusses results. Finally, section 4 concludes the discussion. 2. Theoretical background and hypothesis The new institutional theory predicts that organizations can obtain legitimacy by conforming to the dominant established practice in their industry; and institutional pressures can affect organizations to adopt certain managerial practices (DiMaggio and Powell, 1983). The theory has been widely applied to explain environmental management practices in developed countries (Jennings and Zandergen, 1995; Delmas, 2002; Delmas and Toffel, 2004, 2008; King and Toffel, 2007). However, application in developing countries is limited where most studies use either plant-level data in a specific country (Zhu et al., 2012; Wu et al., 2007) or aggregate country-level data (Guler et al., 2002; Delmas and Montiel, 2008; Neumayer and Perkins, 2005). For instance, the study by Guler et al. (2002) provides a cross-country comparison of diffusion of IC by applying institutional theory using a sample of developed and developing countries. Delmas and Montiel (2008) and Neumayer and Perkins (2005) use both developed and developing countries to study adoption of IC at the country level. Hudson and Orviska (2013) use plant-level data obtained from Asia and East Europe to show that certification increases with plant size and location in big cities. According to DiMaggio and Powell (1983) organizations adopt similar practices due to a combination of three types of institutional pressures. Coercive pressure comes from fear of penalties from a higher power; mimetic pressure comes from imitating actions of successful competitors in the industry and normative pressure is due to implementing a practice because it is the expected professional way which has become appropriate and legitimate in the industry. None of these pressures are independent and a given factor may simultaneously trigger coercive, normative and mimetic pressures (Delmas and Montes-Sancho, 2011; Zhu et al., 2012; Jennings and Zandergen, 1995). In the remaining paragraphs we develop five hypotheses based on institutional theory. We identify coercive, mimetic and normative pressure as coming from outside and inside a given country, i.e., external and internal pressure respectively. Exporting businesses in developing countries face international pressure to manufacture products conforming to international standards or else take-back obligations may set in. Such international pressures may influence the decision to adopt IC (Zhu et al., 2012). For instance, in 1997 the US adopted a mandatory approach to regulate the safety of food including imports (Hazard Analysis Critical Control Points). Food exporters in developing countries are required to comply with these standards to maintain their share in the world market (Anders and Caswell, 2009). Another example is the ‘pesticide residue limit’ in coffee exported from developing countries to Japan. Coffee exporters have to comply with the Japanese standard in order for their products to enter the Japanese market. Thus, we expect businesses that supply foreign markets, and hence subject to international laws, to adopt better environmental practices. Furthermore, different developing countries trading with the same developed country may compete by voluntarily adopting environmental practices so as not to lose their share in the world market. Hypothesis 1. (External coercive pressure): Plants that serve the global market through export have a higher tendency to adopt IC than locally oriented plants.

In addition to external coercive pressure, external mimetic pressure may also influence the decision to adopt IC. This works when businesses in developing countries try to imitate their counterparts in developed countries since these are perceived as having high reputation (Delmas and Toffel, 2004). This mimetic pressure works even if businesses are not fully aware of the benefits of certification. Guler et al. (2002) and Delmas and Montiel (2008) show that, controlling for other factors, countries adopt IC if they form strong trade relations with other countries which already have a high number of IC. This illustrates the possibility of imitating similar businesses in other countries. Liu et al. (2010) find a positive effect of mimetic pressure on Chinese firms' adoption of corporate environmental management practices. Neumayer and Perkins (2005) find that access to telephone, fax, E-mail and Internet increases the likelihood of interaction between early adopters in developed countries and potential adopters in developing countries. This implies that plants which have access to the Internet have a better way of learning and getting information about their counterparts in developed countries. Hence, internationally connected plants may have a higher chance of adopting IC. Hypothesis 2. (External mimetic pressure): Businesses with access to the Internet learn about environmental practices of similar firms in developed countries and mimic them. Furthermore, due to normative pressure we expect multinationals and foreign owned plants in developing countries to adopt IC better than locally owned plants. Zhu et al. (2012) finds that Chinese firms with some foreign ownership or partners are more likely to have financial resources to implement environmental practices thereby transferring their environmental capabilities to developing countries. Prakash and Potoski (2007) find that multinationals transfer corporate practices, such as the adoption of ISO 14001, to developing countries instead of trying to match weak and varying standards in developing countries (GEMI, 2001). One example is Hewlett Packard's mandatory environmental management system and ISO 14001 certification in all its worldwide manufacturing plants, including those in developing countries (Marshall's presentation document on MNCs and environmental management). Another example is Motorola which requires all production plants and suppliers in developing countries to adopt an environmental management system (Rock et al., 2006). Hypothesis 3. (External normative pressure): Multinationals and foreign owned plants are more likely to adopt IC than locally owned plants. In additional to the above external institutional pressures, businesses in developing countries also face domestic or internal institutional pressure. Even though there are no effective environmental regulations, governments and local officials do not ignore serious industrial pollution incidents. When serious industrial pollution incidents occur, for lack of standard enforceable policy, officials turn to other means to make polluters ‘pay’. The main coercive pressure is in terms of bureaucratic burden on businesses that are perceived to be potential threats to the environment. Bureaucratic burden may occur in the form of frequent inspections, meetings with officials, burdensome registration and licensing requirements, or any other forms of red tape. For instance, on April 24, 2013 an industrial accident in textile and garment factories claimed hundreds of lives in Bangladesh. Government officials responded to this by shutting down several other plants in the industry and hiring additional inspectors to inspect businesses for fire safety and structural integrity (ILO website, 2013). Excessive bureaucratic requirements triggered by pollution casualties may encourage businesses to adopt IC. When faced with red tape, businesses adopt IC as a way to prove themselves as safe production units to government officials and hence possibly prevent future

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− Coercive (exporting firms) External pressure − Normative (foreign ownership) − Mimetic (international connection) − Coercive (red tape due to pollution casualties and workers’ unions) Internal pressure − Normative (local industry norm) − Mimetic (imitating others) Controls

International certification in developing countries

− Plant and country characters Fig. 2. Conceptual flowchart.

inspections. In this way, red tape caused by pollution casualties may affect the decision of businesses to adopt IC. Another internal pressure comes from workers' unions who push for safe and healthy working conditions. Faced with pressure from unions, businesses adopt IC as a way to prove themselves as safe working units. Hypothesis 4a. (Internal coercive pressure): Pollution incidents affect a firm's decision to adopt an IC indirectly through increasing red tape in the industry. Hypothesis 4b. (Internal coercive pressure): Plants with a large number of unionized workers have a higher probability of adopting IC. In addition to internal coercive pressure, plants may also face internal mimetic and normative pressures. A plant may seek to adopt an IC just because a number of local competitors have done so in a given sector. For instance, several electronics manufacturers may happen to have IC compared to wood producers, making certification a norm in the electronics industry. Thus, the pressure for individual electronics producers to follow the trend in the industry may be stronger than for wood producers. As Zhu et al. (2012) show these industry differences capture mimetic and normative pressures. Furthermore, different manufacturing activities face different types of environmental challenges and they respond to these differently. Hypothesis 5. (Internal mimetic and normative pressure): Industry differences matter for the decision to adopt IC in developing countries. In addition to external and internal pressures, a plant's specific character may make it more or less likely to adopt IC. For instance, Hudson and Orviska (2013) show that firm location and firm size matters for the adoption of IC. Since certification requires some investment, plants with stronger financial muscle may have the advantage of acquiring it faster. Furthermore, a country's level of development and other specific characters may matter for certification. As illustrated in Fig. 1, we expect plants in middle-income countries to have a higher frequency of IC than poorer counties. In addition, Kerret and Shvartzvald (2012) and Fiorino (2011) argue that democratic countries adopt effective policies that protect the environment better than authoritarian regimes. Thus, we control for plant characteristics as well as country and regional differences. The conceptual idea of this study is presented in Fig. 2.

operate in 35 developing countries.1 These facilities are engaged in the production of textiles, garments, leather, food and beverage, metals, machinery, electronics, chemicals and pharmaceuticals, wood and furniture, non-metallic and plastic materials, paper, auto and auto components, and others. For more detail on data collection process and questionnaire, please visit http://www. enterprisesurveys.org/. Table 1 presents a summary of surveyed plants. Close to 59% of plants are located in Latin America and Caribbean (LCR), about 20% in East Asia and Pacific (EAP), 14% in Africa (AFR) and the rest in the Middle East (ME). Close to 72% of plants are micro-scale plants with fewer than 50 permanent employees on average. The survey asks businesses, “Has your establishment received ISO certification?” and the instruction given to interviewers is to make sure that establishments received and still have an ISO certification. The question is inclusive in that any ISO certification qualifies as long as the plant currently owns it. Since studies show that ISO 9001 and ISO 14001 are the most popular among developing countries (ISO website, 2013; Viadiu et al., 2006), we assume that plants which responded as having an ISO certification are mostly due to ISO 9001 and/or ISO 14001. Furthermore, several studies find that businesses that adopt ISO 9001 eventually end up adopting ISO 14001 as ISO 9001 facilitates the adoption of ISO 14001. Roht-Arriaza (1997) shows that businesses that already certified to ISO 9001 find it easier to create an environmental management system in Asian countries. Viadiu et al. (2006) study how ISO 9001 and ISO 14001 diffuse in similar ways following the same growth patterns. Pan (2003) finds a strong link between the motivations involved in implementing ISO 9001 and ISO 14001. Using a panel data of 139 countries Delmas and MontesSancho (2011) find that the greater the number of existing ISO 9001 certification in a country, the higher is the likelihood for ISO 14001 diffusion in the same country. In Brazil 78% of firms responded that they had ISO 9001 before they implemented ISO 14001 (Oliveira et al., 2010). Thus, we assume that businesses that currently own ISO 9001 but not ISO 14001 are more likely to adopt ISO 14001 in the near future. As a result, those factors that affect a plant's decision to adopt any ISO certification can correctly reflect factors that affect the adoption of ISO 14001. Fig. 3 provides support for this and shows that ISO 14001 is more popular in developing countries than ISO 9001. Furthermore, an increase in the number of ISO 9001 goes hand in hand with adoption of ISO 14001. The figure also indicates that since 2006, more than 50% of businesses that certified to ISO 14001 are in

3. Data, methodology and results To study the different factors that affect the decision of businesses to adopt IC, one needs a plant-level data that differentiates plants owning an IC from those that do not. This study uses Enterprise Surveys of the World Bank collected in 2006. A total of 12,352 manufacturing facilities responded to the survey and these

1 Africa (Angola, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, CongoeDRC, Gambia, Guinea, Mauritania, Namibia, Rwanda, Swaziland, Tanzania, Uganda), Latin American and Caribbean (Argentina, Bolivia, Chile, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Venezuela, Uruguay), East Asia and Pacific (India, Laos), Middle East (Jordan, Lebanon, West Bank and Gaza).

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Table 1 Distribution of surveyed plants (2006). Industry

Income group

Plant sizea

Region

Total number

%

Low

Lower-middle

Upper-middle

AFR

EAP

LCR

ME

Micro

Small

Medium

Large

Textile, leather and garment Food and beverage Metal and machinery Electronics

792 516 664 258

1203 1247 140 20

953 803 435 83

249 432 234 4

626 203 509 255

1891 1727 451 89

182 204 45 13

2042 1761 958 242

317 317 104 40

411 364 124 44

178 124 53 35

2948 2566 1239 361

23.87 20.77 10.03 2.92

Chemical and pharmaceutical Wood and furniture Plastic and non-metal Paper Auto and auto parts Others

364 365 251 37 216 174

667 109 210 19 0 1228

472 50 207 75 0 794

85 385 54 31 0 302

305 105 215 25 216 5

1056 0 348 71 0 1640

57 34 51 4 0 249

989 446 547 101 159 1643

215 34 60 8 20 256

240 38 47 16 26 256

59 6 14 6 11 41

1503 524 668 131 216 2196

12.17 4.24 5.41 1.06 1.75 17.78

Total number Percentage (%)

3637 29.44

4843 39.21

3872 31.35

1776 14.38

2464 19.95

7273 58.88

839 6.79

8888 71.96

1371 11.10

1566 12.68

527 4.27

12,352 100.0

100.0

The bold values are ISO 9001. The light values are ISO 14001. a Plant size is based on average number of permanent workers in the previous year: micro (0e49), small (50e99), medium (100e499) and large (500þ).

developing regions (Africa, Central and South America, East Asia and Pacific and the Middle East). This is a fairly high percentage for developing countries given the cost of adopting an IC and given the lack of enforceable environmental regulation. In the following three sub-sections we present the variables used to test the six hypotheses, discuss the problem of endogeneity and present major findings respectively. 3.1. Data and variable identification To test the six hypotheses presented in section 2, we use responses to the question, “Has your establishment received ISO certification?” where businesses respond as yes (yes ¼ 1) or no (no ¼ 0). Since responses are dichotomous, a Probit model is used to study which factors significantly affect the likelihood that a plant adopts IC. Out of the 12,352 manufacturing facilities which responded to the Enterprise Surveys, a total of 12,086 facilities responded to the specific question of whether they have an IC or not. On average, 18% of businesses own an IC. However, as Fig. 4 indicates there is a significant variation in adoption with respect to plant size and regional location. For instance, while a majority of large-scale plants have adopted IC better than small-scale plants; there is a significant variation in terms of regional location. Only 40% of large-scale plants in Africa have adopted IC as compared to 74% in Latin America and Caribbean. In addition, as Table 2 indicates there is a wide variation in adoption with respect to the different industries ranging from 42% (auto and auto-parts industry) to 4.6% (wood and furniture industry). We test for the effect of both internal and external pressures on the decision to adopt IC and each of the independent variables used to test each hypothesis are described below. To control for external coercive factors, the percentage of sales a plant exports directly or indirectly through distributors is used. This variable is used to test if plants exporting a large share of their sales, and hence facing international law as a coercive factor, have a higher probability of adopting IC. External mimetic pressure is measured by whether the plant regularly uses E-mail to communicate with clients and suppliers. Plants that use E-mail are internationally connected and more likely to learn about the environmental practices of their counterparts in developed countries. External normative pressure is measured by using two variables: the percentage of a plant owned by a private foreign source and a dichotomous response indicating whether the plant uses a foreign-owned technology or not. Using the percentage of foreign-ownership is much better than using a dichotomous variable that indicates

whether the plant is 100% local or 100% foreign-owned. This is because, we can control for plants that have some but not full foreign ownership. Using a foreign-owned technology indicates strong relationship and partnership with other countries and hence better chances of diffusion of management practices.2 In addition to the above variables, senior managers are asked the following question: “In a typical week, what percentage of your time is spent in dealing with bureaucratic requirements imposed by government regulations?” The explanations given are ‘inspections, negotiations, meetings with officials, taxes, customs, labor regulations, licensing and registration, dealing with officials, completing forms, and other bureaucratic burden … include only time dealing with red tape.’ (Enterprise Surveys, The World Bank, http://www.enterprisesurveys.org/). This variable indicates the level of red tape a plant faces and is used to measure internal coercive pressure. It is important to note that bureaucratic requirement does not come from the central (or federal) government; rather the source is from local government officials that have direct contact with businesses. The average time spent dealing with red tape is about 12.79% per week, but as Table 2 indicates there is a wide variation in the different industries. For instance, chemicals and pharmaceuticals face the highest level of red tape whereas wood and furniture producers face the lowest on average. The second variable used to measure internal coercive pressure is the percentage of unionized workers working for the plant. Existence of strong workers' unions may require a safe and healthy work environment and this may pressurize managers to adopt IC pertinent to risk management and social responsibility. We control for this effect by using responses to the question, “What percent of your workforce is unionized?” On average, about 14.6% of workers are unionized where values range from 7.76% for wood and furniture producers to 26.56% for food and beverage producers. Finally, internal normative and mimetic pressures are measured by nine dummy variables identifying the specific manufacturing activity a plant does. These variables are used to test whether plants adopt IC just because it is a norm in their industry and just because others in the industry happen to have it. In addition to the different institutional pressures discussed above, we control for plant characteristics and differences among

2 For all the external pressure variables, since there is no way of distinguishing between foreign developed countries from foreign developing countries, we assume the effect comes mostly and strongly from developed countries. For instance, exports in developing countries are mostly directed to developed countries and the source of foreign ownership is assumed to be mostly from developed countries.

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Share of Developing Countries 60%

50% 40% 30%

ISO 9001

20%

ISO 14001

10% 2012

2011

2010

2009

2007

2008

2006

2005

2004

2003

2002

2001

2000

1999

0%

Fig. 3. ISO 9001 and ISO 14001 in developing regions. Source: constructed based on regional data obtained from ISO website (2013). Source: constructed based on regional data obtained from ISO website (2013). The y-axis measures the number of ISO certificates issued in developing countries (Africa, Central and South America, East Asia and Pacific, and Middle East) as a percentage of the total number issued worldwide in a given year.

3.2. Endogeneity Weak environmental regulatory system and enforcement mechanism in developing countries has contributed to the overall

poor environmental performance in these countries (Dasgupta et al., 1995; Esty and Porter, 2001). Developing countries lag behind in the ranking of environmental performance indicators mostly due to the effect of air and water pollution on human health and the environment (EPI, 2012). Preventable environmental risks claim as many as four million lives a year in developing countries (WHO ISO website, 2013). Unsafe drinking water, urban smog, outdoor air pollution, household air pollution, communicable diseases attributable to environment and exposure to chemicals are still rampant in most developing countries. In fact, World Health Organization (WHO) estimates show that the average number of life years lost per capita in developing countries due to diseases caused by environmental hazards (such as diarrhea, respiratory diseases, perinatal death and cancer) is double that of developed countries (Pruss-Ustun and Corvalan, 2006). Most of the deadly pollution in developing countries is caused by industrial activities (CNN, 2008). Air pollution, water pollution, long term exposure to chemicals, lack of proper disposal of industrial and medical wastes are some of the hazards from uncontrolled and fast industrial production (Blacksmith Institute Report). For instance, the industrial zones of Cubatao, Brazil where large amount of pollutants were emitted from several industries, were labeled as ‘valley of death’ when thousands of residents reported a variety of health problems. Another example is the severe health problems well-documented in Ulsan/Onsan, Korea where many large-scale manufacturing plants are concentrated (Shiru, 2011; Hofmeister et al., 1992). Besides such unregulated pollution, there is also evidence of accidental releases of pollutants resulting in serious health problems, the worst example being the Bhopal incident of 1984 in India.

AFR

80

EPA

LCR

ME

70 Percent of plants with IC (%)

different countries. Since IC costs businesses a significant amount of money we control for plants which have better financial resources by using two variables: relative revenue and availability of intangible assets. Relative revenue is measured by using the ratio of revenue to variable cost (variable cost is the sum of cost of raw materials, cost of energy and wages). Intangible asset is measured by a dummy variable indicating whether the plant has its own website or not. Plant size is expected to affect the decision of plants to adopt IC; this is because bigger plants have more resources needed in the certification process (Hudson and Orviska, 2013). We control for the size of plants by using the average number of permanent employees in the previous year. Likewise, the age of a plant matters and tells us whether the plant has had enough time to mimic environmental practices of competitors. The effect of female ownership is controlled by using a dummy variable indicating whether the largest shareholder or principal owner is female. Within the past three years, about 48% of plants have invested in a new technology that significantly changed production and 56% have introduced a new product line. This indicates that a majority of plants are innovative and undergoing major changes in production. Plants that have invested in a new technology or a new product line may face a different environmental challenge and hence possibly have a different incentive to certify compared to other plants. Furthermore, new products and new techniques of production may already be cleaner, greener, and hence facilitating the certification process. Responses to “Has your company developed a major new product line in the last three years?” and “Has your company introduced a new technology that has substantially changed the way the main product is produced?” are used to control for innovative plants. Differences across regions and countries is measured by three variables: standard of living, quality of democracy and regional dummy variables indicating whether the plant is located in Africa, Latin America and Caribbean, Middle East or East Asia and Pacific. GDP per capita is used to control for differences in living standards. Quality of democracy is measured by using the Economist Intelligence Unit's index of democracy. The index ranges from 10 (full democracy) to 1 (authoritarian regime). The index measures the extent of free and fair electoral process and pluralism, functioning of government, political participation, political culture and civil liberties (Kekic, 2007). Table 3 gives summary statistics of the variables used in this study along with units of measurement.

60 50 40 30 20 10 0 < 20

20-49

50-99 100-249 250-499 500-999 Number of employees (plant size)

Fig. 4. Variation in adoption of IC (12,086 observations).

1,000 +

292

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Table 2 Distribution of plants by industry. Sector

Table 3 Descriptive statistics (t is 2006).

Plants Senior management's Unionized with IC (%) time on bureaucratic workers (%) requirement per week (average, %)

Auto and auto components Electronics Chemical and pharmaceutical Metal and machinery Food and beverage Other manufacturing Plastic and non-metal Paper Textile, leather and garment Wood and furniture

42.92 32.58 29.90 21.88 18.53 18.08 15.53 10.77 10.26 4.62

13.76 11.63 14.69 12.85 12.98 12.67 12.09 12.00 13.14 6.22

8.54 9.66 13.09 18.94 26.56 17.18 11.32 11.1 13.58 7.76

All plants

18.18

12.79

14.6

Despite the lack of effective and enforceable instruments to regulate producers, governments in developing countries do not ignore significant industrial pollution incidents that claim many lives and have a long lasting effect. Studies show that perception of the public toward a plant is highly affected by memories of past pollution incidents within the industry (Saksena, 2007). Similarly, when industrial pollution incidents occur government officials respond by increasing bureaucratic requirements for businesses. The industries in Cubatao had to individually negotiate on specific issues with local officials in order to clean-up their waste as well as invest in end-of-the-pipe and cleaner technologies to prevent future risks. Another example is South Asia where local environmental conditions influenced negotiation between businesses and local officials who found it efficient to set plant-specific environmental requirements instead of uniform national standards (UNEP, 2001). Therefore, the variable that measures red tape is not fully exogenous as industrial pollution and casualties can trigger bureaucratic requirements. Furthermore, another source of endogeneity for the variable used to measure red tape is reverse causation. This is possible if plants that adopt an IC end up facing less red tape, and hence the change in red tape is not due to exogenous reasons, rather it is due to the choice of the plant to adopt an IC. We control for sources of endogeneity by using a two stage instrumental variable approach where previous year's industrial pollution and industrial pollution effects are used as possible instrumental variables. Previous year's industrial pollution and industrial pollution effects may affect current year's bureaucratic requirement, but current decision to adopt an IC affects neither previous year's industrial pollution nor its effect. We show that change in industrial pollution and its effect does not directly lead to change in managerial practices (such as adopting an IC) except via its effect on red tape. Industrial pollution is measured by using CO2 emission per capita (metric ton per capita) and industrial pollution effect is measured by using two variables which indicate the burden of industrial pollution: percentage of deaths caused by pollution and percentage of disability adjusted life years lost (DALY) due to pollution. Percentage of deaths caused by industrial pollution is measured by dividing number of attributable deaths by the total number of deaths in a country. Deaths attributeable to pollution are those caused by air, soil and water pollution with chemicals or biological agents, solar ultraviolet radiation, anthropogenic climate changes, noise and electromagnetic fields, exposure to chemicals like lead and mercury, occupational carcinogen, airborne particulates, ecosystem degradation and built environment (WHO, 2008). Disability adjusted life years lost (DALY) is a measure of population health that combines years of life lost due to premature

Variables IC (0 ¼ No/1 ¼ Yes) Age of plant (years) Permanent workers (average, t  1) Female ownership (0 ¼ No/1 ¼ Yes) Revenue/variable cost Export share (% sales) Foreign ownership share (%) E-mail use (0 ¼ No/1 ¼ Yes) Website (0 ¼ No/1 ¼ Yes) Bureaucratic requirements (%) New technology (0 ¼ No/1 ¼ Yes) Foreign technology (0 ¼ No/1 ¼ Yes)

Mean

Standard Maximum Minimum Observations deviation

0.18 20.21 82.76

0.38 17.40 324.35

1 196 18,000

0 0 0

12,086 12,236 12,191

0.28

0.45

1

0

12,352

14.78 12.19

589.46 26.96

56,640 100

1.41e06 9555 0 11,927

7.89

25.41

100

0

11,839

0.66

0.47

1

0

12,328

0.35

0.47

1

0

12,294

12.79

18.77

100

0

12,119

0.48

0.499 1

0

11,494

0.11

0.31

1

0

11,418

1

0

10,840

100 37

0 15

11,778 34

36

14

34

6.28

0.02

35

7.96

2.02

35

8717.2

94.76

34

New product line 0.56 0.495 (0 ¼ No/1 ¼ Yes) Unionized workers (%) 14.61 31.74 Death due to pollution 23.17 5.87 (%) t  1 DALY due to pollution 22.08 6.35 (%) t  1 1.47 1.51 CO2 emission (metric ton per capita) t1 Democracy index 5.33 1.74 (1e10) GDP per capita 2273.4 2309.5 (constant 2000 $)

Data on death and DALY due to pollution and GDP per capita are missing for West Bank and Gaza.

death and years lived with a disease attributed to environmental pollution. Percentage of DALY caused by pollution is calculated by dividing DALY due to pollution over total DALY. DALY attributable to pollution are caused by air, soil and water pollution with chemicals or biological agents, solar ultraviolet radiation, anthropogenic climate changes, noise and electromagnetic fields, exposure to chemicals like lead and mercury, occupational carcinogen, airborne particulates, ecosystem degradation and built environment (WHO, 2008). Data is obtained for each country from the Global Health Observatory of the WHO. Studies show that mortality due to pollution and disability adjusted life years lost due to pollution can be used to approximate the burden of environmental pollution (Briggs, 2003). Fig. 5 indicates a positive correlation between industrial pollution effects and subsequent red tape in 101 developing countries. One concern with using industrial pollution and industrial pollution casualty as instrumental variables to explain variation in red tape is that these are country-level variables whereas red tape is specific to each plant. This raises the question of why government officials respond differently to different plants given the same level of industrial pollution and casualty in the country. This heterogeneity can be due to several factors. First, how local officials perceive a specific plant with respect to causing serious pollution really matters. This may depend on the industry of the plant and proximity of the plant to the major polluting industrial zone. It may also depend on information local officials have regarding history of the specific plant and its reputation in using clean technology, what chemicals are produced or used on-site and their effect on health

M.G. Fikru / Journal of Environmental Management 144 (2014) 286e296

293

30

25 R² = 0.1567

Red tape (%)

20

15

10

5

0 10

15

20

25

30

35

40

Percent death due to pollution (%) Fig. 5. Correlation between industrial casualty and subsequent red tape. Source: Author's calculation based on Enterprise Surveys, The World Bank (http://www.enterprisesurveys. org/) and WHO data. The x-axis measures percentage of death caused by pollution (death due to pollution over total death) and values are taken for the year 2004. The y-axis measures the percentage of time per week senior management spends dealing with bureaucratic requirements and values are average taken from 2005 to 2012.

and environment, information officials have regarding previous complaints toward the plant, etc. In addition, baseline conditions matter where a region known for poor air quality may not trigger a strong response from officials for the same level of pollution in a relatively cleaner region (Saksena, 2007). All these factors affect the perception of local officials toward a plant and the extent of red tape it faces. In general, as Fig. 5 indicates countries which, on average, have a higher industrial pollution casualty, have a more bureaucratic regime for their businesses. 3.3. Results and discussion Table 4 presents results from several regressions and post estimation tests. Models A and B present results using all the three instrumental variables (CO2 emission per capital is instrument #1, percent of death due to pollution is instrument #2, percent DALY due to pollution is instrument #3). All instruments are taken from previous year's value. Model B controls for more variables as compared to model A. Models C and D use only one instrument, whereas models E and F use two instruments.3 The Sargan's test of overidentifying restriction is conducted on models A, B, E, and F since the number of instruments used exceeds the number of endogenous variable. Failure to reject the Sargan test indicates that all the chosen instruments are statistically valid. Another confirmation that the instruments are valid is from models C and D which are just identified (Murray, 2006) and which give very similar results. The SmitheBlundell test of exogeneity for red tape is significant in all cases, and suggests that the variable used to measure red tape is correctly modeled as endogenous. As Table 4 indicates, both external and internal institutional factors affect the decision of businesses to adopt IC in developing countries. Businesses which derive a large share of their sales from

3 We also used an interaction term of all the three instruments as an additional instrumental variable. Results are very similar and hence not reported for brevity. The regression output using only instrument 3 did not converge and hence not reported. Furthermore, we run a regression using an exogenous model with no instruments and not controlling for the endogeneity of red tape- results are very similar except for the red tape variable which is no more statistically significant. This suggests that red tape affects the adoption of IC only if triggered by industrial pollution and casualties.

export have a significantly higher probability of adopting IC. Businesses with a large percent of foreign ownership also have a significantly higher probability of adopting IC. This result is consistent with studies which find multinationals and foreign plants to be the major channel through which management practices such as ISO certification diffuses to developing countries. Plants that use technology licensed from a foreign-owned company have a higher chance of adopting IC. This may be because the foreign technology, probably coming from advanced countries with stricter environmental scrutiny, is cleaner and fulfills safety and other standards. This may also be due to the strong relationship between foreign plants in advanced economies and local plants that choose to use their technologies. Businesses which use E-mail to communicate with clients or suppliers are more likely to adopt IC better than businesses which do not use E-mail. This may be because plants which use E-mail are better connected and more likely to get information and knowledge about management practices in advanced countries. Even locally owned plants with no export share (hence weak external coercive and normative pressures) may adopt IC by mimicking similar firms in developed countries. The two variables which measure internal coercive pressure are also statistically significant and positively related to the likelihood of adopting IC. First of all, plants with a large percent of unionized workers have a higher probability of adopting IC; this shows the role of local institutions in the adoption of management practices. Worker and labor unions may force measures that ensure a healthy and safe working environment, and faced with such pressure businesses legitimize themselves by adopting IC. Secondly, the variable used to measure red tape has a positive and statistically significant coefficient. This indicates that when managers are faced with high bureaucratic requirements triggered by past industrial pollution and past pollution casualties, they respond by adopting IC as a way to legitimize their businesses and possibly avoid future inspections. Regression results also indicate that internal normative and mimetic factors are important. For instance, the effect of institutional pressures on adopting IC is lower for textile and leather producers and wood and furniture producers. On the other hand, electronics and auto and auto-parts producers have a significantly higher rate of certification suggesting that IC may cluster in these

294

M.G. Fikru / Journal of Environmental Management 144 (2014) 286e296

Table 4 Probit regression with instrumental variables. Variables

Dependent variable: Adoption of IC (Yes ¼ 1, No ¼ 0) A

B

C

D

E

F

External coercive pressure Export share

0.0061a (0.0009)

0.0068a (0.0011)

0.0036a (0.0009)

0.0071a (0.0016)

0.0067a (0.0010)

0.0067a (0.0011)

External mimetic pressure E-mail

0.4695a (0.0676)

0.3101a (0.0818)

0.1798a (0.0642)

0.2656b (0.1326)

0.3320a (0.0764)

0.3264a (0.0778)

External normative pressure Foreign ownership share Foreign technology

0.0053a (0.0009) 0.5987a (0.0739)

0.0031a (0.0011) 0.4969a (0.0916)

0.0016a (0.0006) 0.2602a (0.0610)

0.0029b (0.0016) 0.5567a (0.1481)

0.0031a (0.0011) 0.4851a (0.0834)

0.0031a (0.0011) 0.4882a (0.0855)

0.1022a (0.0163)

0.1088a (0.0270) 0.0020b (0.0010)

0.0490a (0.0042) 0.0011b (0.0005)

0.1730b (0.0999) 0.0004 (0.0015)

0.0924a (0.0260) 0.0020a (0.0009)

0.0963a (0.0262) 0.0020a (0.0009)

Internal mimetic and normative pressure Textile, garment and leather Food and beverage Metal Electronic Chemicals Wood and furniture Plastic Auto and parts Paper

0.5818a (0.1016) 0.0634 (0.0971) 0.1238 (0.1207) 0.6369a (0.1797) 0.0385 (0.1212) 0.3307b (0.1832) 0.1598 (0.1463) 0.6301a (0.2090) 0.5643 (0.4113)

0.3032a (0.0771) 0.0254 (0.0489) 0.0798 (0.0638) 0.3326a (0.0863) 0.0436 (0.0656) 0.1750b (0.0897) 0.0918 (0.0783) 0.3560a (0.1319) 0.2573 (0.2000)

0.6901a (0.1691) 0.1296 (0.1501) 0.0527 (0.2349) 0.6186a (0.2520) 0.1437 (0.2842) 0.3544 (0.2361) 0.0694 (0.2137) 0.4531 (0.3517) 0.9500 (0.7531)

0.5643a (0.0941) 0.0468 (0.0895) 0.1478 (0.1110) 0.6208a (0.1646) 0.0793 (0.1121) 0.3248b (0.1718) 0.1718 (0.13495) 0.6601a (0.1907) 0.4845 (0.3804)

0.5677a (0.0960) 0.0493 (0.0914) 0.1431 (0.1135) 0.6256a (0.1684) 0.0706 (0.1144) 0.3253b (0.1749) 0.1706 (0.1378) 0.6533a (0.1953) 0.5034 (0.3887)

Plant characters Age Plant size Female ownership Revenue/variable cost New technology New product line Website

0.0039a (0.0017) 0.3404a (0.0380) 0.0128 (0.0645) 0.0000 (0.0002) 0.1114 (0.0717) 0.2430a (0.0782) 0.3978a (0.069)

0.0022b (0.0011) 0.1821a (0.0412) 0.0078 (0.0330) 0.000 (0.0001) 0.0644c (0.0397) 0.1165a (0.0331) 0.2120a (0.0524)

0.0027 (0.0028) 0.3447a (0.0534) 0.0208 (0.0874) 0.0002 (0.0003) 0.1159 (0.0982) 0.3423b (0.1733) 0.3731a (0.0945)

0.0041a (0.0016) 0.3387a (0.0346) 0.0142 (0.0595) 0.0000 (0.0002) 0.1193c (0.0662) 0.2185a (0.0728) 0.3943a (0.0631)

0.0040a (0.0016) 0.3390a (0.0354) 0.0137 (0.0608) 0.0000 (0.0002) 0.1175c (0.0676) 0.2243a (0.0741) 0.3950a (0.0646)

0.0000b (0.0000) 0.1186a (0.0393) 0.8030a (0.2216) 0.3206a (0.1031) 0.3856c (0.2197) 3.6937a (0.4395) 10,168

0.0000b (0.0000) 0.1400a (0.0501) 1.0014a (0.3135) 0.1944 (0.1402) 0.1813 (0.4140) 4.5486a (0.6385) 8224

0.0000a (0.0000) 0.0612a (0.0172) 0.4435a (0.0890) 0.1222c (0.0754) 0.0427 (0.1673) 2.2345a (0.2248) 8224

e 0.1345b (0.0780) 1.2915c (0.7869) 0.5094a (0.1855) 0.0429 (0.5266) 5.2017a (1.6532) 8224

0.0000b (0.0000) 0.1167a (0.6059) 0.8359a (0.2973) 0.2222c (0.1293) 0.0901 (0.3828) 4.1896a (0.6059) 8224

0.0000b (0.0000) 0.1213a (0.0476) 0.8742a (0.3008) 0.2132c (0.1322) 0.1147 (0.3908) 4.2807a (0.6134) 8224

1,2,3

1,2,3

1

2

1,3

1,2

Internal coercive pressure Red tape Unionized workers

Country character GDP per capita Democracy AFR LCR ME Constant Observations Post estimation tests Instruments usedd Sargan test Ho: instruments are valid SmitheBlundell test Ho: red tape is exogenous a b c d

2.49

4.543 a

83.40

a

34.62

N/A 22.18

N/A a

11.77

0.591 a

23.44

1.75 a

26.31a

Significant at 1%. Significant at 5%. Significant at 10%. Standard errors are presented in parenthesis. CO2 emission is #1; percent of death due to pollution is #2; percent DALY due to pollution is #3.

industries. This illustrates the role of specific industry norms and influencing others in the same sector to adopt similar practices. The probability that older businesses adopt IC is higher than that of newer businesses. This may be because newer firms have not had enough time to imitate others in the sector. As expected, large-scale plants have a higher tendency to adopt IC than small-scale plants, probably because they have the required resources. Results also show that innovative plants which invested in a new product line have a better chance of adopting IC. The ownership of a company website turns out to be a significant determinant of IC whereas relative revenue is neither statistically nor economically significant. The variables used to control for country and regional variations show some interesting result. Democratic countries have on average a higher tendency to adopt IC than authoritarian regimes. The coefficient on GDP per capita is statistically significant but with no real economic effect since the coefficients are all very close to zero. This suggests that, after controlling for institutional pressures

and plant characteristics, the level of development may not matter for the adoption of IC. There are also relevant regional variations in the adoption of IC, where the African dummy variable shows a statistically significant positive coefficient. This suggests that the estimated internal and external factors are more pronounced for African businesses relative to other developing countries, after controlling for other factors. On the other hand, the Latin American and Caribbean dummy variable is statistically negative indicating that the discussed institutional factors may have a lower effect in these countries. 4. Conclusion The focus of this study is identifying institutional drivers of voluntary participation in environmental practices, such as the adoption of IC, in developing countries. Even though adoption of IC does not necessarily imply improvement in actual environmental

M.G. Fikru / Journal of Environmental Management 144 (2014) 286e296

outcomes, it indicates the effort of management to influence environmental impact (Jasch, 2000; Roht-Arriaza, 1997). Voluntary environmentalism is still at its early stage in developing countries. Yet, the results of this study have some important implications. First, results are consistent with past studies that show the role of external institutional factors in the adoption of IC in developing countries. We find that businesses that export, have some foreign ownership and are internationally connected have a higher probability of certifying. Governments in developing countries should identify improvement in information and communication infrastructures as a priority that is as important as poverty reduction. This would facilitate a cheap and easy access to Internet services through which businesses and the general public can learn lessons from other countries. The new insight gained from this study is that, in addition to external factors, internal factors, though undermined due to lack of environmental regulations in developing countries, also play a significant role in affecting the adoption of IC. Even though there are no strong environmental regulations in developing countries, governments do not turn a blind-eye to industrial pollution and casualties. They respond by increasing bureaucratic regulations for businesses. Bureaucratic requirements triggered by industrial pollution and its effects can affect the decision of businesses to adopt IC. The second internal pressure identified as affecting the decision of businesses to adopt IC is the influence from workers' unions. This suggests that local institutions can be leveraged in countries where policy is ineffective. The findings of this study suggest that developing countries should not only work toward poverty reduction but also progress toward democratization in order to encourage the creation of a greener private sector. Furthermore, the findings of this study suggest that a ‘one size fits all’ prescription (Hudson and Orviska, 2013) does not apply in developing countries since adoption of environmental practices differs from region to region, emphasizing the role of culture and other country-specific characters, and from industry to industry reflecting some industry-specific challenges. References Alemagi, D., Oben, P., Ertel, J., 2006. Implementing environmental management systems in industries along the Atlantic coast of Cameroon: drivers, benefits and barriers. Corp. Soc. Responsib. Environ. Manag. 13, 221e232. Amaeshi, K., Kenneth, M., Adi, B., Ogbechie, C., Amao, O., 2006. Corporate social responsibility in Nigeria: Western mimicry or indigenous influences? J. Corp. Citizenship 24, 83e99. Anders, S., Caswell, J., 2009. Standards as barriers versus standards as catalysts: assessing the impact of HACCP implementation on US seafood imports. Am. J. Agric. Econ. 91, 310e321. Baughn, C., Bodie, N., McIntosh, J., 2007. Corporate social and environmental responsibility in Asian countries and other geographical regions. Corp. Soc. Responsib. Environ. Manag. 14, 189e205. Blackman, A., 2008. Can voluntary environmental regulation work in developing countries? Lessons from case studies. Policy Stud. J. 36, 119e141. Blackman, A., 2010. Alternative pollution control policies in developing countries. Rev. Environ. Econ. Policy 4, 234e253. Blackman, A., 2012. Does eco-certification boost regulatory compliance in developing countries? ISO 14001 in Mexico. J. Regul. Econ. 42, 242e263. Blackman, A., Lahiri, B., Pizer, W., Planter, M.R., Pina, C.M., 2010. Voluntary environmental regulation in developing countries: Mexico's chemical industry program. J. Environ. Econ. Manag. 60, 182e192. Blackman, A., Uribe, E., Hoof, B.V., Lyon, T., 2012. Voluntary environmental agreements in developing countries. The Colombian experience. RFF working paper No 12-06. Blacksmith Institute Report. The hidden tragedy. Pollution in the developing world. Retrieved from: http://www.blacksmithinstitute.org/. Briggs, D., 2003. Environmental pollution and the global burden of disease. Br. Med. Bull. 68, 1e24. Christmann, P., Taylor, G., 2001. Globalization and the environment: determinants of firm self-regulation in China. J. Int. Bus. Stud. 323, 459e558. CNN, 2008. Retrieved from: http://www.cnn.com/2008/WORLD/asiapcf/03/09/eco. cities/#cnnSTCText. Corbett, C., Kirsch, D., 2001. International diffusion of ISO 14000 certification. Prod. Operat. Manag. 10, 327e342.

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