Iso A 1

The Promises and Pitfalls of ISO 14001 for Competitiveness and Sustainability A Comparison of Japan and the United States* Eric W. Welch University of Illinois at Chicago, USA

Ashish Rana and Yasuhumi Mori National Institute for Environmental Studies, Japan This paper investigates the theoretical and empirical reasons why Japan leads the world in adoption of ISO 14001, while the US lags, and the comparative effect of ISO 14001 on environmental performance of adopters in both countries. Findings suggest that institutional barriers to adoption are much higher in the adversarial policy climate of the US than in the more reciprocal policy climate of Japan. Expected benefits of adoption are lower than the reported realisation, and this finding is significant for some categories such as competitive market advantage and relationships with regulators. Findings regarding the effect of ISO on environmental performance are mixed, but generally point to a relatively limited effect. We conclude that, even if ISO 14001 has a moderate effect on firm environmental action, the structural barriers in the US generally limit the viability of these types of voluntary policy.

l ISO 14001 l Japan

l United States

l Competitiveness l Sustainability l Policy evaluation

l Global policy diffusion

Eric W. Welch is an Assistant Professor in the Graduate Program in Public Administration at the University of Illinois at Chicago. He earned his PhD in public administration at Syracuse University’s Maxwell School of Citizenship and Public Affairs where his research focused on the self-regulatory environmental behaviour of companies. Currently, in co-operation with researchers at the National Institute for Environmental Studies in Japan, Dr Welch is investigating patterns of business greening in Japan, private-sector adoption of the ISO 14001 environmental management system in Japan, and the evolution and effectiveness of the Japanese system of pollution control agreements. He has recently published articles on related topics in environmental policy and management in such journals as Policy Science, Journal of Environmental Planning and Management and Business Strategy and the Environment.

u

Graduate Program in Public Affairs, University of Illinois at Chicago, 412 S. Peoria St, Room 138, Chicago, IL 60607, USA

!

[email protected]

Dr Ashish Rana is a research fellow at the National Institute for Environmental Studies, Tsukuba, Japan. His research interests are sector- and firm-level analyses of energy and environment policy and integrated assessment modelling. He has worked intensively on macroeconomic models development and application for developing countries. He has published articles in peer-reviewed journals and also contributed to Working Group III IPCC Third Assessment Report.

u

National Institute for Environmental Studies, 16-2 Onogawa, Tsukuba, Ibaraki, Japan

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[email protected]

Dr. Mori Yasuhumi studied agricultural science at the University of Tsukuba, Japan. Since 1984, he has worked for several environmental science institutes and is presently senior researcher at the National Institute for Environmental Studies, Japan, and an expert for the national delegation to the International Organisation for Standardisation. His main research activities are related to development of environmental management systems including life-cycle assessment and its application.

u

National Institute for Environmental Studies, 16-2 Onogawa, Tsukuba, Ibaraki, Japan

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[email protected]

* We acknowledge the generous funding for this project from the Japan Ministry of Environment Global Environment Research Fund. The Global Environment Research Program aims to promote multidisciplinary and international research through sponsoring projects that facilitate interaction among researchers and the accumulation of scientific knowledge for the protection of the global environment. We also thank the anonymous referees for their helpful comments and suggestions.

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© 2004 Greenleaf Publishing

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A

doption of the international organisation for standardisation

(ISO) 14001 environmental management system standard is an organisation-level decision undertaken primarily by private-sector facilities. While it is generally hoped, and often assumed, that adoption of ISO 14001 leads to improvements in both environmental management and economic competitiveness of the facility, the nature of the relationship between economic and environmental performance has been shown to be complex and variable (Wagner et al. 2001; Schaltegger and Synnestvedt 2002). Around the world, adoption rates differ significantly among nations with Japan as a world leader and the United States as a world laggard (Welch et al. 2002). And, while recent literature on voluntarism indicates that national institutional frameworks within which facilities operate create nuanced incentive structures that can favour or disfavour, accelerate or decelerate adoption by facilities (Prakash 1999; Delmas 2002; Kollman and Prakash 2002), little research has been undertaken to compare the ISO 14001 experiences of Japan and the US. This paper represents findings from the first survey designed to simultaneously compare ISO 14001 perspectives and resulting behaviour of US and Japanese manufacturing facilities. The primary research questions are: why are adoption rates so much higher in Japan than in the US and what are the different effects of adoption in the US and Japan? To investigate potential answers to these questions, the rest of this paper is presented in five parts: a comparison of the status of ISO adoption in Japan and the US; a discussion of the literature on voluntarism and ISO 14001 adoption; a description of the survey design and data; the analysis; and a final conclusion section.

ISO 14001 in Japan and the United States ISO 14000 comprises a set of environmental management standards and guidelines for

such activities as environmental performance, auditing, labelling and life-cycle assessment that was initially established in 1996 by the International Organisation for Standardisation.1 Organisations seeking ISO 14001 certification must undertake four broad steps: define an environmental policy, develop an environmental plan, implement the plan and continually monitor the implementation process. The detail behind these broad categories is generally extensive, complex and costly for the organisation to accomplish (Zharen 1995; Cascio 1996; Delmas 2002). Japan is by far the world leader while the US comes in sixth with comparatively low adoption rates. As of June 2002, Japan had twice as many new adoptions as the next nation, Germany, and more than four times the number of US adopters (see Fig. 1). New adoption rates over time indicate that the gap between US and Japan appears to be increasing rather than decreasing (see Fig. 2). These gaps provided the initial motivation for this study.

Literature on adoption and effectiveness of voluntary instruments In general, the literature that analyses voluntary environmental activities by polluters wrestles with two questions: what drives firms to volunteer and to what extent does voluntarism result in measurable environmental and economic change (Arora and Cason 1996; Khanna and Damon 1999; Alberini and Segersen 2002; Melnyk et al.

1 www.iso.ch, November 2002.

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the promises and pitfalls of iso 14001 for competitiveness and sustainability

40 35 30

%

25 20 15 10 5

Fr an ce Ot he rs

Ita ly

Au

str ali a

A Ch ina

US

ain Sw ed en

Sp

UK

Ge

rm

Jap

an

an y

0

Figure 1 top iso adoptions by country, june 2002 Source: ISO, www.ecology.or.jp/isoworld/english/analy14.htm

10,000

Japan

9,000 8,000 7,000 6,000 5,000 4,000 3,000

USA

2,000 1,000 0 1995

1996

1997

1998

1999

2000

2001

2002

Figure 2 comparison of new iso 14001 adoptions in japan and usa Source: ISO, www.iso.ch/iso/en/prods-services/otherpubs/pdf/survey11thcycle.htm

2002)? To take the first question first, the certification process is time-consuming and costly to the polluting organisation. Not only are there certification and information search and costs, there is also the potential for legal challenges resulting from required information disclosures (Quazi 1999; Russo 2001; Delmas 2002). As rational entities, adopting facilities must perceive that the returns of certification outweigh the investment and risk. In general, returns can be divided into two different types: direct economic advantage and indirect advantages through improved network relations, both of which may enhance overall competitiveness. Opportunities to realise direct economic advantages for the firm may occur as they prepare for certification; facilities may realise a variety of technological and managerial opportunities to cut material and energy waste in their production processes (Gray et al. 1996; Fielding 1998; Schaltegger and Burritt 2000). Moreover, firms that voluntarily

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eric w. welch, ashish rana and yasuhumi mori

address environmental aspects of their production processes may be beneficially perceived in financial markets as carrying lower levels of risk (Williams et al. 1993; Khanna and Damon 1999). Voluntarism may also serve as a cue to consumers wishing to purchase products and services from environmentally proactive firms (Williams et al. 1993; Arora and Gangopadhyay 1995). Finally, internal analysis of waste streams and decision processes, driven initially by voluntary programme requirements, may result in process and product innovations that create new products that appeal to environmentally aware consumers (Wagner et al. 2001). Therefore, adopter firms may report higher a priori expectations of direct economic advantages than non-adopters and, if adoption delivers as anticipated, they should also report a posteriori realisation of these advantages. As nodes in a complex network of organisations, firms are linked with regulators, suppliers and other stakeholders in ways that affect their viability in the market (Finneman and Clarke 1996; Clarke and Roome 1999; Roome 2001). Adoption of an environmental management system such as ISO 14001 is often thought to provide advantages within these networks. For example, regulatory agencies may increasingly reward firm voluntary environmental efforts with reduced oversight, reporting requirements or less adversarial relationships (Lyon and Maxwell 2002; Alberini and Segersen 2002). Smoother interaction with regulators probably also reflects good relationships with other stakeholders such as environmental groups (Bucholz 1993; Dillon and Fischer 1992; Berry and Rondinelli 1998). Additionally, as the global environmental management system becomes increasingly diffused, certified facilities may be preferred business partners (Kollman and Prakash 2001; Delmas 2002). If such advantages help to drive adoption of ISO 14001, adopters should report higher a priori expectations and a posteriori incidences of network facilitation than non-adopters. Despite the fact that ISO 14001 is a global standard, adoption takes place in a national institutional context. The literature indicates that expectations and realisations of the costs and benefits, as well as the effects of adoption on environmental performance, depend on the institutional setting within which facilities operate. Generally, scholars have found that business–government relations in the US are more adversarial than in Japan, where they are found to be more co-operative and mutually supportive (Okimoto 1989). Similarly, environmental policy in the US has been characterised as highly antagonistic, in which strong environmental groups demand strict, legally enforceable command-and-control regulation (Kollman and Prakash 2002). The Japanese regulatory climate, by contrast, is often perceived to be more reciprocal such that government and business share authority in both the economic and environmental domains (Samuels 1987; Welch and Hibiki 2002). With respect to environmental policy, an adversarial climate often creates a tradition of mistrust which generally leads government and environmental groups to discount a firm’s voluntary action as motivationally suspect, while the firm is less likely to trust government with disclosure of environmental information that might be used against it at some future point (Kollman and Prakash 2001). Russo (2001: 27) also suggests that the adoption of ISO 14001 represents a signal to the external institutional environment; in contexts where adoption is not necessarily considered to be an important signal of commitment, there will be lower levels of adoption. While these arguments may help explain the gap between ISO 14001 adoption rates in Japan and the US, they have not been tested directly. As noted by Kollman and Prakash (2001), the institutional perspective should also help to predict national differences in outcomes of adoption of voluntary programmes such as ISO 14001. For example, disclosure of environmental information may be lower in an adversarial than in a consensual national context. In addition, firms in a stricter command-and-control environment may have already implemented more targets and be more environmentally efficient than firms in less adversarial environments. How-

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the promises and pitfalls of iso 14001 for competitiveness and sustainability

ever, in many areas, prediction of facility expectations and realisations about the benefits to voluntarism is difficult. For example, voluntarism may lead to a comparatively greater perceived improvement in relations with regulators in adversarial contexts simply because the expectations are much larger, or because there is a stronger tradition of selfregulation in a non-adversarial environment. On the other hand, volunteers in an adversarial environment may, for historical reasons, severely discount their ability to bridge this gap.

Data and descriptive statistics This paper utilises cross-national survey data of private-sector ISO 14001 adopters and non-adopters that were collected simultaneously in Japan and the United States between March and May 2001. Samples in both countries were taken from two primary populations of facilities: ISO adopters and non-adopters. For the Japan survey, each of the two primary strata were subdivided into four industry substrata (electronics, electrical power, electric machinery and chemical manufacturing), while the US sample was further divided into nine different industry substrata (electronic equipment, electric power, industrial and commercial machinery, chemicals and allied products, rubber and plastics, primary metal industries, fabricated metal products, paper and allied products, transportation equipment). The US sample contained more industries because too few facilities had adopted ISO 14001 in any four industry classifications (by two-digit SIC code). In the US case, a random sample of 726 ISO adopters was combined with a random sample of 1,675 US facilities. The survey was administered according to a modified Dillman method (2000). Of the 698 valid ISO adopter and 1,489 non-adopter surveys sent out, we received 143 (20.5%) and 97 (6.5%) usable responses, respectively. The total response rate for the survey was 11.0%. This low response rate creates potential for bias; however, it is not an unusual rate for environmental surveys of private-sector firms (Melnyk et al. 2002). Our analysis indicates that, in general, responses by industry and by size do not differ significantly from proportions in the random sample. Nevertheless, generalisation from the US portion of this study to US facility environmental behaviour more broadly is problematic and should be done with care. The Japanese survey was administered at approximately the same time using the same survey design. A total of 3,227 facilities were randomly selected. Of 1,515 ISO adopters and 1,712 non-adopters surveyed, facilities provided 1,237 (82%) and 481 (28%) usable responses, respectively. This translates into an overall response rate of 56%. Table 1 provides descriptive statistics for the survey. Employees, capital and operating budget are all measured as categorised ranges where a lower categorical value represents a lower range of actual values. (For example, number of employees is measured on the following scale: 1 < 50 employees, 50 ≤ 2 < 300, 300 ≤ 3 < 1,000, 1,000 ≤ 4 < 5,000, 5,000 ≤ 5.) Revenues are reported as percentages. Comparison of the size of firms in the two samples shows that US adopter firms have larger capital and operating budgets and more employees than their Japanese counterparts, while US non-adopters have fewer employees but larger budgets. Within Japan, ISO facilities have more employees but smaller capital and operating budgets than nonISO facilities. Within the US, ISO firms are much larger on all three counts. The proportion of facilities having an environmental division or an environmental manager in Japan is higher than in the US (adopter and non-adopter alike), and Japanese adopters report the highest average number of full-time environmental employees. Nearly 50% of the Japanese and less than 40% of US ISO adopters reported having entered into a

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eric w. welch, ashish rana and yasuhumi mori

ISO-certified

Non-certified

Japan

USA

Japan

USA

Employees

2.78 (0.82)

2.87 (0.96)

2.17 (0.93)

1.60 (0.94)

Capital

1.85 (0.35)

3.62 (0.64)

1.90 (0.31)

2.28 (1.15)

Operating budget

1.54 (0.50)

3.98 (1.23)

1.71 (0.45)

3.07 (1.35)

Revenue from Japan sales

81.20 (34.39)

4.94 (10.29)

91.52 (17.55)

0.97 (2.52)

Revenue from US sales

7.69 (13.46)

81.81 (19.63)

2.86 (7.43)

95.01 (10.01)

Revenue from European sales

5.67 (10.04)

11.07 (14.02)

2.31 (6.86)

3.33 (8.06)

Proportion local voluntary agreement

0.48

0.37

0.24

0.18

Proportion environmental division

0.93

0.75

0.54

0.27

Proportion environmental manager

0.96

0.87

0.63

0.36

Manager involved in top meetings

5.66 (2.07)

5.07 (1.77)

5.13 (2.42)

5.19 (1.71)

Environment FTEs

5.36 (8.59)

3.71 (11.00)

2.32 (4.96)

3.23 (13.43)

143

398a

75*

Sub-sample size

1237

* Facilities certified in other EMSs were removed from the sample.

Table 1 descriptive statistics of iso and non-iso adopters in the us and japan

voluntary environmental agreement with a local government agency. Non-adopters in both nations report much lower levels of such agreements. Finally, Japanese and US adopters are more involved in international trade than non-adopters. In sum, ISO adopters in both countries are generally larger, more involved in trade and have more substantial environmental management structures than non-adopters.

Analysis This section is divided into three parts, each of which compares adopters and nonadopters in the US and Japan from different perspectives. The first section compares US and Japanese expectations of the benefits of certification with their realisation of those expectations. The second section examines the effect of ISO 14001 adoption on environmental and economic values of the facility. The final section analyses the effect of adoption in both countries on environmental practices of facilities.

Expectations versus realisations ISO 14001 adopters were first asked about the extent to which they believed that certifica-

tion would benefit them along multiple dimensions (listed in Tables 2 and 3). Each was then asked to indicate the extent to which their expectations were realised along the

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the promises and pitfalls of iso 14001 for competitiveness and sustainability

Japan Recently certified

USA

Early certified

Recently certified

Early certified

Market advantage from green consumers

4.41 (1.67)

4.55 (1.69)

4.46 (2.08)

4.50 (1.81)

Ability to attract high-quality employees

3.62 (1.58)

3.42 (1.52)

2.77 (1.61)

3.12 (1.72)

Government reimbursement of certification costs

1.95 (1.55)

1.69 (1.82)

1.31 (1.01)

1.29 (0.73)

Competitive advantage in production

4.87 (1.41)

4.96 (1.45)

3.96 (1.82)

4.55 (1.67)

Better relations with regulators

4.09 (1.69)

4.17 (1.79)

4.54 (1.88)

4.89 (1.57)

n.a.

n.a.

2.50 (1.82)

2.58 (1.11)

Reduced pressure from external groups

2.79 (1.58)

2.65 (1.61)

2.73 (1.80)

2.93 (1.71)

Economic advantage with ISO suppliers

4.15 (1.82)

4.00 (1.77)

3.38 (2.02)

3.75 (1.86)

Tax relief from government

2.63 (1.67)

2.59 (1.60)

1.58 (1.27)

1.28 (0.62)

319

915

26

94

Reduced regulatory requirements

Sub-sample size n.a. = not applicable

Table 2 expectation of iso 14001 benefits

Japan Recently certified

USA

Early certified

Recently certified

Early certified

Market advantage from green consumers

3.73 (1.44)

3.99 (1.48)

2.84 (2.30)

3.54 (2.08)

Ability to attract high-quality employees

3.31 (1.36)

3.37 (1.41)

1.92 (1.53)

3.21 (1.96)

Government reimbursement of certification costs

1.94 (1.41)

1.63 (1.27)

1.36 (1.32)

2.05 (2.18)

Competitive advantage in production

4.24 (1.30)

4.55 (1.42)

3.24 (1.98)

4.26 (1.92)

Better relations with regulators

3.40 (1.64)

3.72 (1.73)

3.12 (1.92)

4.41 (1.89)

n.a.

n.a.

1.80 (1.58)

2.46 (2.06)

Reduced pressure from external groups

2.89 (1.44)

3.00 (1.55)

2.20 (1.83)

3.20 (2.08)

Economic advantage with ISO suppliers

3.62 (1.56)

3.68 (1.61)

2.04 (1.57)

3.22 (2.09)

Tax relief from government

2.09 (1.33)

1.99 (1.38)

1.40 (1.32)

2.01 (2.12)

Reduced regulatory requirements

n.a. = not applicable

Table 3 realisation of expected iso 14001 benefits

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eric w. welch, ashish rana and yasuhumi mori

same dimensions. Expectation was measured from low (1) to high (7) and realisation from none (1) to full (7). Results shown in Table 2 indicate that facilities held comparatively higher expectations in four areas: market advantage from green consumers, competitive advantage in production, better relations with regulators, and economic advantage from ISO suppliers. Firms had relatively moderate expectations of attracting higher-quality employees and reducing pressure from external groups. It is interesting to observe that they had low expectations of tax relief from government, reimbursement of certification costs by government and reduced regulatory requirements, even though they had expected to improve relations with regulators. This may indicate that firms were relatively realistic in formulating their expectations. Note that because this was an ex post survey, some of the responses to these questions may be biased due to hindsight and other factors. Two other observations can be made from Table 2. First, in the Japanese case, recently certified firms scored higher than early adopters across five of the eight dimensions. This trend is reversed for the US sample: seven of the nine dimensions had lower scores for recent adopters than for early adopters. Hence, recent adopters may be more optimistic than early adopters in Japan, while recent adopters are more pessimistic than early adopters in the US. Second, in all but two cases—reduced pressure for external groups and better relations with regulators—overall expectations are higher for Japanese than for the US firms. These findings may indicate limited support for institutional theory: firms in less adversarial environments may be generally more responsive to cooperative policy regimes and, because relations between government and business are already strong in less adversarial countries, expectations for improvements in ties with regulators are lower than for firms in more adversarial environments. The results in Table 3 indicate that there may be some time delay in the realisation of expected benefits from ISO adoption: in general, early adopters perceive higher levels of realisation than recent adopters. This observation is in keeping with findings from other research (Bansal 2002). Comparing Tables 2 and 3, facilities report that their expectations have not been realised. There are a few exceptions to this. One is the perceived realisation of reduced pressure from external groups by both groups of Japanese facilities and by early adopters in the US. Second, low expectations of government reimbursement of certification costs have generally been realised by all four groups of facilities. To further analyse this data, differences in ratings for realisations and expectations were computed for each category (Japan/US–recent/early adopters). Early adopters are defined as those facilities that adopted ISO 14001 before December 1999. When the realisation rating matches the expectation rating, a difference score of zero is recorded. If the realisation score is higher (lower) than the expectation score, the result is a positive (negative) difference. The magnitude of difference indicates how well the realisation fulfils the expectation. Figure 3 shows the analysis of difference in realisations over expectations for each of the eight dimensions. In these charts, the rating differences were plotted on the x-axis and the proportion of firms on the y-axis. Thus, each point on the chart represents the proportion of firms having a particular ratings difference. The graphs show that in all categories a majority of facilities report no difference between realisation and expectation scores. Another interesting observation is that large differences, whether positive or negative, are observed only for a small proportion of firms. This implies that most facilities felt either only marginally better off or marginally worse off with respect to their expectations about the benefits from adopting the ISO system. When we compare the proportion of facilities on the positive difference side with the proportion on the negative difference side, we notice that, except for Japanese firm and US early adopters’ responses to ‘reduced pressure from external groups’ and US firm responses to ‘government reimbursement of certification cost’, the balance tilts towards

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GMI 44 Winter 2003

Japan: recent z = -3.4318 p = 0.0003

z = -7.5081 p = 0.0000

z = -7.3589 p = 0.0000

z = -5.0632 p = 0.0000

z = 0.1391 p = 0.4447

−6 −4 −2 0 2 4 6

z = -6.5474 p = 0.0000

−6 −4 −2 0 2 4 6

z = 1.4147 p = 0.0786

−6 −4 −2 0 2 4 6

0.8

−6 −4 −2 0 2 4 6

1

z = -7.0558 p = 0.0000

0.6 0.4

Consumer

Employees

−6 −4 −2 0 2 4 6

−6 −4 −2 0 2 4 6

z = -2.0094 p = 0.0222

z = -10.667 p = 0.0000

−6 −4 −2 0 2 4 6

−6 −4 −2 0 2 4 6

Production

Regulators

External groups

Suppliers

z = -2.3002 p = 0.0107

z = -2.8957 p = 0.0019

z = -0.3381 p = 0.3677

−6 −4 −2 0 2 4 6

−6 −4 −2 0 2 4 6

−6 −4 −2 0 2 4 6

USA: recent z = -1.6547 p = 0.0490

Government

Production

Regulators

−6 −4 −2 0 2 4 6

z = -9.0530 p = 0.0000

Tax relief

z = 0.4045 p = 0.3429

−6 −4 −2 0 2 4 6

z = -3.3586 p = 0.0004

−6 −4 −2 0 2 4 6

Japan: early

−6 −4 −2 0 2 4 6

External groups

Suppliers

Tax relief

z = 2.6529 p = 0.0040

USA: early z = -1.9551 p = 0.0253

z = -0.6011 p = 0.2739

z = -2.9328 p = 0.0017

z = 2.2396 p = 0.0126

−6 −4 −2 0 2 4 6

z = -4.5163 p = 0.0000

Government

Production

Regulators

External groups

Suppliers

−6 −4 −2 0 2 4 6

−6 −4 −2 0 2 4 6

Tax relief

−6 −4 −2 0 2 4 6

z = -2.9731 p = 0.0015

Suppliers

−6 −4 −2 0 2 4 6

−6 −4 −2 0 2 4 6

−6 −4 −2 0 2 4 6

z = 0.6846 p = 0.2468

Employees

External groups

z = -9.9256 p = 0.0000

Government

z = -3.0250 p = 0.0012

Regulators

−6 −4 −2 0 2 4 6

z = -2.3761 p = 0.0087

Production

−6 −4 −2 0 2 4 6

z = -1.7782 p = 0.0377

z = -11.936 p = 0.0000

−6 −4 −2 0 2 4 6

Employees

Government

−6 −4 −2 0 2 4 6

Consumer

Consumer

1 0.8 0.6 0.4 0.2 0

−6 −4 −2 0 2 4 6

z = -8.2661 p = 0.0000

−6 −4 −2 0 2 4 6

z = 5.2685 p = 0.0000

−6 −4 −2 0 2 4 6

1 0.8 0.6 0.4 0.2 0

Employees

−6 −4 −2 0 2 4 6

1 0.8 0.6 0.4 0.2 0

Consumer

−6 −4 −2 0 2 4 6

0

−6 −4 −2 0 2 4 6

0.2

Tax relief

USA: early

1 0.8 0.6 0.4 0.2 0

−6

−5

−4

−3

−2

−1

0

1

2

3

4

5

6

External groups

Notes: 1. z and p values refer to the Wilcoxon Signed-Rank statistic and associated probability, respectively. 2. Please refer to Tables 2 and 3 for description of categories (e.g. ‘Consumer’ means ‘market advantage from green consumers’) 3. ‘Reduced regulatory requirement’ was dropped from this analysis since no data for Japan exists.

Figure 3 proportion of respondents by magnitude of difference in realisations of expected benefits over expectations (see text for explanation)

eric w. welch, ashish rana and yasuhumi mori

Japan

USA

ISO-certified

Non-certified

ISO-certified

Non-certified

Reducing raw materials

4.44 (1.45)

4.43 (1.46)

4.94 (1.43)

5.20 (1.55)

Increasing recycled inputs

3.33 (1.53)

3.66 (1.55)

3.81 (1.66)

4.25 (1.72)

Energy efficiency

3.62 (1.60)

4.12 (1.51)

4.88 (1.54)

5.27 (1.65)

Reducing water use

3.39 (1.55)

3.89 (1.50)

3.81 (1.52)

3.97 (1.91)

Reducing CO2

2.82 (1.43)

3.24 (1.51)

2.91 (1.48)

3.35 (1.78)

Reducing waste

2.55 (1.44)

3.08 (1.55)

4.26 (1.60)

4.20 (1.94)

Increasing product life

4.05 (1.48)

4.38 (1.48)

4.92 (1.64)

5.06 (1.73)

Developing environmentally benign products

3.15 (1.57)

3.45 (1.56)

3.84 (1.55)

3.74 (1.70)

Table 4 effect of iso 14001 on firm values (environment versus competitiveness)

the negative side for all the counts. This contrast is sharp for ‘market advantage from green consumers’, ‘ability to attract high-quality employees’, ‘improved relations with regulators’ and ‘advantage from ISO-certified suppliers’. It appears that expectations of the two commonly touted indirect benefits of ISO adoption, improved regulator relationships and supply chain effects, are unrealistically high and not easily fulfilled. In addition, expectations of direct competitive and market advantages are unrealistically high. To determine statistically whether adopting ISO fulfilled expectations, a nonparametric equivalent of the t-test—the Wilcoxon Signed-Rank test—was performed on the pairs of expectation and realisation responses. The null hypothesis is that differences between ratings of realisations and expectations are centred on 0 and the alternative hypothesis is that ratings are different (accept null at p > 0.05). The z and p statistics are given in Figure 3. Except in a few cases, the test is significant at the 5% significant level. Exceptions where there is no statistical difference between realisations and expectations are: ‘market advantage from green consumers’ and ‘tax relief from the government’ in the case of late adopters in Japan; ‘advantage from ISO-certified suppliers’ and ‘tax relief from government’ in the case of late adopters in the US; and ‘advantage from green consumers’ and ‘better relations with regulators’ in the case of early adopters in the US. In all other cases the ratings are statistically different, hence we can be confident about the basic conclusions drawn in the analysis of Tables 2 and 3, and in Figure 3. Direct consumer benefits and indirect supplier and regulatory benefits are poorly perceived by firms; two of those, consumer advantages in Japan and the US and regulatory advantages in the US, have relatively high expected benefits, but low realisation.

Environmental values To explore differences in values between ISO and non-ISO firms, respondents were asked to indicate the extent to which their efforts on each of the eight actions listed in Table 4 were driven primarily by a concern for environmental quality or by a concern for economic competitiveness. They were to rate each of the factors on a response scale of

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primarily environmental quality (1) to primarily economic competitiveness (7). Table 4 presents the averages of responses for each category of firms for Japan and the US. On the whole, Japanese facilities score higher environmentally than US firms. This is true even when non-certified Japanese firms are compared with certified US firms. Moreover, ISO-certified firms in both nations perceive themselves to be, almost across the board, more environmentalist than non-certified firms. Researchers have surmised that ISO 14001 does not ‘convert’ firms towards greater environmentalism, rather that more environmental firms are more likely to adopt voluntary programmes in the first place. To test this, we compared responses of early and late adopters, expecting that if some kind of conversion process takes place, early adopters would score lower on the scale. Results showed no significant differences between the two groups in either country. Therefore, it appears that a self-selection bias does dominate with respect to values. Detailed analysis of Table 4 shows that Japanese firms believe waste and CO2 reduction to be primarily matters of environmental quality, while reducing raw materials and increasing product lifetime are driven more by economic competitiveness concerns. Other actions fall somewhere in between the two cases. CO2 reduction by US firms is associated primarily with environmental values, while economic considerations drive efforts to reduce raw material use and increase product lifetime in both countries. In addition, US firms consider energy efficiency improvement to be primarily economically driven. Interestingly, reducing waste also appears to be more strongly influenced by economic considerations in the US than in Japan. This may reflect higher ultimate costs of waste management in the US (Aoki and Cioffi 1999).

Environmental practices This section examines five categories of environmental practices—general environmental action, disclosure, targets, supplier action and policy change—to determine the effect of ISO 14001 adoption on the environmental practices of firms. Borrowing from a similar question used by Ramus and Steger (2000), firms were asked to indicate, yes or no, whether they engaged in 11 different environmental activities including: publish an environmental policy, publish an annual environmental report, use eco-labelling, apply environmental considerations to purchasing decisions, use life-cycle analysis, systematically reduce fossil fuel use, systematically reduce toxic chemical use, undergo environmental audit using a third-party organisation, use eco-efficiency principles, publicly report toxic chemical use and keep track of environmental expenses. The first row in Table 5 shows the average number of these practices reported. ISO-certified firms in Japan and the US have higher average scores than non-certified firms in their respective countries. Moreover, Japanese certified firms report higher scores than US-certified firms, while the Japanese non-certified firms indicate lower scores than US non-certified firms. Regarding disclosure practices, firms were asked to indicate whether they make available each of ten different types of environmental information (energy use, raw material use, water use, CO2 production, air pollution, waste, recycling, environmental expenses, objectives and audit results) to different levels of internal stakeholders (top decision-makers, general management, all employees) and external stakeholders (publicly on request or all public and stakeholders). Firm disclosure was scaled from 1, for disclosure to top managers only, to 5, for full disclosure to the public. Thus an average of scores represents the degree of disclosure openness of the firm. Row two in Table 5 shows that certified firms in both countries have more open disclosure policies than the non-certified firms in their respective countries. In addition, although overall disclosure

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eric w. welch, ashish rana and yasuhumi mori

Japan

USA

ISO-certified

Non-certified

Recently certified

Early certified

ISO-certified

Non-certified

Recently certified

Early certified

Environmental action

7.46 (1.74)

4.56* (2.17)

6.71 (1.80)

7.98* (1.65)

7.33 (1.50)

4.80* (2.07)

7.40 (1.62)

7.20 (1.28)

Disclosure

2.76 (1.16)

1.47* (1.56)

2.44 (1.16)

2.96* (1.17)

2.32 (1.09)

0.87* (1.07)

2.27 (1.20)

2.54 (0.93)

Supplier action

2.80 (0.98)

1.85* (0.87)

2.51 (0.93)

3.04* (0.99)

2.44 (0.99)

1.68* (0.81)

2.17 (0.96)

2.64* (1.07)

Targets

4.36 (1.79)

2.07* (2.11)

3.79 (1.73)

4.77* (1.82)

4.57 (1.61)

3.24* (1.64)

4.18 (1.57)

4.98* (1.60)

* Significant difference of means (p < 0.05)

Table 5 changes in firm environmental practice

levels are low, those in Japan are higher than in the US. This is in keeping with expectations attributed to institutional theory in which polluters in more adversarial policy contexts are less likely to divulge information that could be used against them at some future point in time. Another important aspect of private-sector environmental practice concerns how firms influence the environmental behaviour of their suppliers. Respondents were asked how often (1 = never; 5 = always) they carried out each of four types of actions: review supplier’s past environmental records, confirm supplier ISO certification, review evidence showing supplier’s environmental commitments, and review supplier’s environmental audit. Resulting average scores, provided in row 3 of Table 5, show that ISO-certified firms tend to take these actions more often than non-certified ones. Findings also show that on average certified and non-certified US firms do less to evaluate the environmental practices of suppliers than their Japanese counterparts. These trends are partially reflected in the numbers of targets that firms set for their environmental performance. Firms were asked whether they had established specific environmental targets in eight areas: reduction of raw material use, increased use of recycled inputs, energy efficiency, reduction of water use, reduction of CO2, reduction of waste production, increased product lifetime and developing more environmentally benign products. The last row of Table 5 shows that on average ISO-certified firms have established a higher number of targets than non-certified firms. However, as might be expected from institutional theory, basic target levels are higher in the adversarial policy environments. In general, it appears that Japanese adopter firms are somewhat more environmental than US adopter firms. In addition, difference-of-means tests indicate that ISO adopters score significantly higher than non-adopters in all cases for both countries. To test whether self-selection applies here, we again separated ISO adopters into two categories: early and recent adopters. Findings showed that early adopters in Japan reported significantly higher average levels of all four types of environmental action, while the same was true for supplier action and target development in the US. At face value, this finding seems to run counter to predictions, indicating some real effects of adoption over time. However, it is also possible to interpret this finding to mean that the most environmentalist facilities adopted ISO first and the more recent, second wave, simply runs fewer programmes, discloses less, has a smaller number of targets and checks suppliers less frequently.

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Discussion This paper had two objectives: to explore the reasons for the difference in adoption rates of ISO 14001 between US and Japan, and to analyse the extent to which ISO 14001 makes a difference in environmental outcomes. Institutional theory and findings from other literature were used to guide the analysis. We utilised data from a cross-national survey of ISO adopters and non-adopters. Findings generally support expectations of institutional theory that voluntary policies are better suited for non-adversarial contexts, such as Japan, than for adversarial contexts, such as the US. Expectations were generally higher in Japan than in the US, and, while recent US adopters are generally more pessimistic than early adopters, the opposite is true in Japan. Clearly, Japanese firms tend to believe that adoption will result in a broader scope of benefits, direct and indirect, than do US firms. The primary exception concerned US adopters’ expectations that regulatory relationships would improve. This finding can be explained as a manifestation of the adversarial climate of the US (Kollman and Prakash 2001). It can also be interpreted as evidence that voluntarism is used consciously and proactively by US firms to influence future regulation (Lyon and Maxwell 2002). Nevertheless, on average, expectations were not realised. Respondents do not perceive that the expected benefits of certification were fulfilled. This finding was especially sharp (significant) with respect to expectations about green purchasing for recent adopters in the US and Japan, and for expectations about improved relationships with regulators for early adopters in the US. It appears either that the highly publicised benefits of adoption are not being fulfilled, or that firms are being unrealistic in their a priori assessments of the benefits. Regardless, this finding may have particularly important implications for the future diffusion of ISO 14001. For example, broader understanding of the perceived gap between expectation and realisation of improved relationships with regulators may actually raise a barrier to adoption in the US. This finding also shows the inherent structural barriers to voluntary policies in adversarial policy environments more generally. Analysis of the comparative effect of ISO adoption on environmental values is at once suggestive and inconclusive. Compared with non-adopters, ISO adopters in both countries reported environmental considerations to weigh more heavily as determinants of facility actions. However, follow-up analysis found no evidence indicating that early adopters were more environmentalist than recent adopters. These findings support the idea that more environmentalist firms are more likely to adopt, and that adoption has little effect on their outlook. Hence, based on this analysis, ISO does not appear to affect the fundamental balance of values of the firm. Other analysis showed that ISO adopters in Japan and the US significantly outperformed non-adopters in all four areas. Japanese ISO firms also reported slightly more environmental activity in three areas—breadth of activities, disclosure and evaluation of suppliers—than US firms. Areas predicted by institutional theory to favour US noncertified firms—targets and breadth of action—were indeed found to have higher reported values than those of Japanese non-adopters. We tested whether self-selection was at work here, and found that early Japanese adopters reported significantly higher averages for all four categories than did non-adopters, and US early adopters reported significantly higher averages for two of the four categories. On the one hand, this indicates that ISO may be associated with some enhancement of environmental action over time. On the other, early and late adopters may simply represent two categories of firms: very environmentalist and moderately environmentalist.

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The seemingly contradictory findings, that adoption leads to no change in environmental values, but may lead to change in environmental action, could point to the flexibility and longer-term effects of the standard. Once adopted, the continuous evaluation and improvement elements of the standard may rationalise a continuous improvement cycle, something that proponents often hope occurs. This hypothesis is developed by Dixit and Olson (2000). However, firms are able to make these improvements in ways that do not betray their fundamental values. Ultimately, these findings may indicate that ISO 14001 is living up to its label as a ‘flexible standard’ and, as others note, allows some firms the ability to ‘catch up’ to environmental best practices of their respective industries (Russo 2001: 26; Russo and Corbett 2001: 27). While this conclusion may be optimistic, it is important to return to the first observation of this paper, that diffusion rates of ISO 14001 in the US are far below those of Japan. The US, as the world’s largest economy and, in many cases, largest polluter, appears to have an institutional context that inhibits its ability to diffuse voluntary programmes and policies. Adoption of a voluntary instrument appears to have a higher threshold for viability in adversarial policy environments such as the US. If so, then the speed of diffusion in adversarial nations will depend on either the market or regulatory benefits of adoption. Firms in adversarial environments may need a stronger push or pull to adopt, but once adoption takes place the standard may work as designed, encouraging continuous improvement of environmental performance. To further the chances of success in the US (and other adversarial nations), regulators and other stakeholders will need to develop stronger incentives or disincentives for adoption (as did Germany in the case of EMAS; Kollman and Prakash 2001). Unfortunately for the US, the fractured nature of the political system makes a co-ordinated effort on this front all the more difficult.

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