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Do+Corporate+Env+Stds+Create+Market+Value

Do+Corporate+Env+Stds+Create+Market+Value - Do Corporate...

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Do Corporate Global Environmental Standards Create or Destroy Market Value? Glen Dowell * Stuart Hart * Bernard Yeung 263 College of Business, University of NotreDame, Notre Dame, Indiana 46556 Kenan-Flagler Business School, University of NorthCarolina, Chapel Hill, North Carolina 27599 New York University, Stern School of Business, 44 W 4th Street, Room 7/65, New York, New York 10012,and William Davidson Institute, University of Michigan Business School, Ann Arbor, Michigan 48109 [email protected] * [email protected] * [email protected] Arguments can be made on both sides of the question of whether a stringent global corporate environmental standard represents a competitive asset or liability for multi- national enterprises (MNEs) investing in emerging and developing markets. Analyzing the global environmental standards of a sample of U.S.-based MNEs in relation to their stock market performance, we find that firms adopting a single stringent global environmental standard have much higher market values, as measured by Tobin's q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract foreign direct investment may end up attracting poorer quality, and perhaps less competitive, firms. Our results also suggest that externalities are incorporated to a significant extent in firm valuation. We discuss plausible reasons for this observation. (Direct Investment in Developing Countries; Firm Value; Firm-Level Environmental Policy) 1. Introduction Global companies have become major players on the world stage. There are now in excess of 40,000 multi- national enterprises (MNEs) with some 250,000 for- eign affiliates, investing more than $200 billion abroad each year (UNCTAD 1995). About 40% of world trade consists of intrafirm transfers of materials and compo- nents within MNEs (Greider 1997). The 10 largest MNEs have annual sales in excess of the gross national products of the 100 smallest countries in the world (Hawken 1993, p. 92). Foreign direct investment (FDI) now exceeds official development assistance by a factor of five, whereas five years ago it was less than half (Wolfensohn 1997). MNEs create, leverage, and arbitrage capabilities on a world scale. They are known to make positive contributions in economic efficiency (see, e.g., Caves 1996, Ch. 7) and serve as a conduit for the globaliza- tion of economies. However, MNEs have also proven elusive of public policy controls because of their economic power and ability to shift resources and production across borders. Questions have been raised concerning MNEs' social and environmental performance (e.g., in regard to their pollution record and labor practices, etc.) Social critics have argued that MNEs, in seeking to reduce costs, play employees and countries against one another, creating downward pressure on wages and social standards on a world- wide basis (Gladwin et al. 1995, Greider 1997).
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