International Integration: A Hope for a Greener China?

Abstract

Purpose: In recent years, an optimistic view of international economic integration countering the pollution haven hypothesis has gained momentum. It argues that international integration can benefit developing countries' environments by fostering the adoption of voluntary environmental standards, such as ISO 14001 certification, coined as the "trade up" argument by Prakash and Potoski (2006). This paper investigates the validity of the "trade up" argument in the context of China.

Methodology: Theoretical modeling and case studies.

Finding: This paper finds that international trade does gear up the adoption of ISO 14001 standards in China through increasing pressures from international green customers. However, our model and case studies suggest that the adoption of ISO 14001 certification does not necessarily improve firms' compliance with existing environmental regulations in China. We also find that in China, ISO 14001 certification motivates little, if any, environmental performance improvement beyond bottom-line environmental regulations.

Implications: This finding suggests that we need to treat the "trade up" argument with caution, especially as the assertion was made that "Chinese authorities also could use ISO 14001 as an alternative to regulations" in consideration of limited policy enforcement capability (Conway, 1996; Christmann and Taylor, 2001). ISO 14001 is a complement to, instead of a substitute for, environmental regulations.

Originality and values: The first component of the "trade up" argument- international trade promotes the adoption of ISO 14001 certification in developing countries-has been studied widely, while few efforts have been made to explore the second component: ISO 14001 certification helps improve firms' actual environmental performance in developing countries. This paper fills this gap by providing the first study of the environmental impacts of ISO 14001 certification in China through a theoretical exploration and in-depth case studies. Our study warns that the "trade up" argument needs to be scrutinized more carefully before being considered in policy making. To our best knowledge, this is the first effort to develop a theoretical model for the interactions among firms, green customers, environmental agencies and certification bodies. Our empirical approach, which investigates the environmental impacts of ISO 14001 certification from the perspective of the certification body, also is original. When studying the environmental impacts of ISO 14001 certification, we differentiate between two types of environmental benefits: (i) noncompliant firms achieve compliance with environmental regulations; and (ii) compliant firms achieve improvement beyond environmental regulations. This distinction is critical, but existing research has not identified and examined it.

Keywords: International Trade, Green Customers, Pollution Haven Hypothesis, ISO 14001, China, Environment

JEL Classification: F15, F23