Tough environment policy needed

By Anies Rasyid Baswedan

HYATSVILLE, Maryland, United States (JP): Multinational corporations (MNCs) are the latest version of the modern corporation. Since the middle ages, modern corporations have gone through various stages with regard to corporate values evolution. The history of corporate management shows how corporations behaved toward labor in the early days of modern business.

Labor was simply considered a "resource", and very little care and few benefits went to them. There was no social security nor concern for a healthy working environment. In most industrialized countries, this kind of labor treatment could only be found in history textbooks. Labor is now considered an important component of economic activity.

The same kind of treatment was used toward the environment. Corporations previously simply considered the environment an unlimited economic resource. But this viewpoint has also changed. The environment has come to be recognized as an integrated part of economic activities that needs to be preserved. This is a result of the evolution of modern corporate values that took decades or even centuries to develop in countries that are now industrialized nations.

On the other side of the globe, in many developing countries, including Indonesia, the understanding of environmental issues has not changed and the exploitative treatment of labor itself has not yet become part of history. Throughout Indonesia, bad labor conditions, low wages and an unhealthy working environment, are still common. Compared to corporations in industrialized countries, Indonesian businesses have not yet undergone this evolution of corporate values and culture regarding labor and a modern understanding of the environment. In this older paradigm, corporations consider environmental issues a threat to their business since these issues often increase their costs, although only in the short run.

These two different views toward the environment represent the gap between corporations in the industrialized and in the developing countries. This difference should no longer exist since today's reality shows that the world is facing one and the same problem, regardless of geographic location: that is, the degradation of the ability of nature to support the life of all God's creatures on earth. This degradation is acknowledged as an outcome of the current technological revolution and economic behavior.

As the world becomes "smaller", interestingly enough, corporations expand their operations in the search for new markets or resources. These corporations are mostly based in industrialized countries, but they have expanded their operations to developing countries. Therefore, they face the two different corporate values that are described above.

The industrialized-country-based and developing-country-hosted MNCs are a unique case. This is interesting because MNCs in many ways have the same character as the environmental problem: both are borderless. The MNCs operate across nation-state boundaries as do environmental problems. Many environmental problems, such as global warming and air pollution, are international problems. But they both also face the same constraints, that is, environmental policies and standards that vary from one country to another.

MNCs respond in two ways toward this variation of environmental standards, the passive method, where they operate according to local environmental laws or policies and the active method, where they operate according to the standards of their home country (Hopfenbeck, 1993). But environmental policy variation often creates an incentive for MNCs to apply the passive method where they operate according to the host country's environmental standards.

According to Porter, an expert of strategic management from Harvard Business School, private corporations started recognizing the benefits of being environmentally friendly in the mid 1980s. Private corporations began taking advantage of environmental issues as an opportunity for their business.

While Porter's analysis may be true for corporations in industrialized countries where environmental awareness has greatly increased over the past 15 years, this opportunity may not exist when private corporations are operating in less environmentalistic societies.

Theoretically and ethically, MNCs should be an agent of environmental awareness all over the world. Baumgartl (1995) mentioned eight potential roles that could be played by MNCs. Two of those roles are to become a model for environmentally friendly production methods and to transfer environmentally related technologies.

But in most cases, as economic players, MNCs will behave according to economic values, not moral or social values. Therefore, expecting MNCs to be an agent of the development of international environmental awareness without economic incentives is quite unrealistic.

The MNCs' environmental policies are always related to how these MNCs prioritize various contributing factors. Table 1 shows how the MNCs consider those factors in relation to their policies and concern toward the environment. This figure was drawn from a survey of 100 corporations including 73 MNCs that are operating in Indonesia. It was conducted by the Inter-University Center for Economic Study, Gadjah Mada University.

The MNCs consider government programs and national laws as the two most important factors in their decisions regarding the treatment of the environment, higher than the economic motivation of reducing costs. It is also interesting that MNCs put public pressure as the lowest of all other contributing factors, with a considerable gap of index points.

In the case of industrialized countries such as the U.S., public pressure is usually considered to be an important factor, especially after the U.S. developed its policy on Toxic Release Inventories.

In addition, public pressure in the U.S. could soon translate into regulations and could be very influential in forcing corporations to work together concerning important environmental issues.

In Indonesia, public pressure about environmental problems is often weak, especially when compared to the severity of environmental problems in remote areas. In a broader view, this explains how corporations "adjust" and take advantage of a country's political reality.

In a country where political power is laid upon the people, public pressure becomes important. In contrast, in a country where the people have only limited political power, corporations are less likely to consider the voice of the people. Instead, they perceive the government as the most important factor in their decision regarding the environment. This figure provides an indirect snapshot on the Indonesian political reality.

Based on Table 1, the government plays a strong role in determining MNCs behavior while the public is relatively weak. This shows that the MNCs will generally try to obey the government's environmental policies. The supply oriented MNCs have limited contact with the public. For example, the mining industry, by its nature, operates in remote areas far from public attention and its products are mostly shipped out of the country. Only people who have some business connections with the mining industry will likely understand the situation. Mentioning these issues in newspapers and magazines is somewhat rare.

The above arguments are likely to support Porter's thesis. Porter (1996) said strict environmental regulations can prod corporations to produce more efficient products that will be valued highly internationally. This does not mean that corporations will be happy about tough regulations since it will increase short-term costs and they need to redesign the process of production. But the benefits of tough standards will be particularly large in the industries that have international markets and competition.

The ability to adjust is a key to survival in modern business. The MNCs that are operating in Indonesia must have those experiences as well. Since MNCs consider government regulations important in forming their strategic policies, MNCs will adjust to external changes such as environmental regulations.

On one hand, Indonesia should not consider environmental relaxation as a potential factor in maintaining foreign investment. And on the other hand, the corporations including MNCs are likely to comply with the government's environmental policy changes.

The common assumption that tough environmental standards will reduce the willingness of MNCs to operate in a foreign country might no longer be true. MNCs are willing to comply with the government's environmental standards. But are Indonesia's standards and enforcement good enough to protect the environment?

The writer, alumni of Gadjah Mada University, is currently a graduate student at the University of Maryland, United States.

Window A: According to Porter, an expert of strategic management from Harvard Business School, private corporations started recognizing the benefits of being environmentally friendly in the mid 1980s.

Window B: On one hand, Indonesia should not consider environmental relaxation as a potential factor in maintaining foreign investment. And on the other hand, the corporations including MNCs are likely to comply with the government's environmental policy changes.