Environmental Performance of Manufacturing Firms in Vietnam Characteristics and Determinants of Success

■2012 JSPS Asian CORE Program, Nagoya University and VNU University of Economics and Business Environmental Performance of Manufacturing Firms in Vietnam: Characteristics and Determinan

■2012 JSPS Asian CORE Program, Nagoya University and VNU University of Economics and Business

Environmental Performance of Manufacturing Firms in Vietnam:

Characteristics and Determinants of Success

VNU University of Economics and Business Pham Quynh Anh *

Abstract: The paper identifies and analyses characteristics, determinants of pollution abatement activities of

manufacturing firm in Vietnam to meet environmental protection requirements Logistic models are used for a

number of newest sub-datasets of enterprise annual survey conducted by Vietnam General Statistic Office,

covering approximate 5000 manufacturing firm in Vietnam in the year 2009 The study reveals that small- and

medium-sized enterprises (SMEs) or private-owned enterprises (non-SOEs) have made greater efforts to reduce

emission as compared to the large ones (LEs) or state-owned, foreign investment enterprises (SOEs, FIEs)

respectively However the former sector has been less successful than the latter in satisfying environment

standards Environmental system management, firm size, environmental staffs, the foreign firms are the driving

forces for firm becoming the government environmentally or ISO 14001 certified In contracts, private local

ownership, fluid and solid emission volume has significantly negative sign of coefficient Firm’s pollution

abatement expenditure, in both absolute and relative terms, is not the important factors for its pollution treatment

success

Key words: Firm’s environmental performance, environmental effort, environment success, emission volume,

pollution abatement, government and ISO 14001 certification

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1 Introduction Following the Rio de Janeiro

Earth Summit 1992, environment protection has

evolved from consciousness to comprehensive

action programs at both macro- and micro – level,

across virtually all industrialized and

industrializing countries As a result, the

considerable number of studies on environmental

responsiveness of firms has been increasing,

especially in developed economies Beyond the

works on determinants of firm’s environmental

responsiveness (Knudsen and Madsen 2001, Hojat

et al 2010), many studies focus on relatively

different themes reflecfactors affecting

environmental protection movements in the context

of each group of country (Lin, 2011) While

pollution prevention based on technology

innovation and product stewardship is emerging

research topic in developed economies

(Brunnermeier and Cohen 2003, Lefebrve and

Talbot 2003, Filed 2006), pollution control with

end-of-pie technology and environmental

regulation compliance is the prominent subject in

developing economies where there are prevalent

limitations of firm financial capability, government

legal framework and society’s environmental

protection awareness (Dasgupta et al 2001,

Ruiz-Tagle 2006)

Industrialization has been accelerated in Vietnam

since the early 1990s with the waves of foreign

investment and a latter explosion of newly established

private firms Accordingly, pollution has been being

serious and there merely have been a small number of

management reports on manufacturing firms’

attempts in pollution abatement in order to meet

domestic and international environmental standards

However, studies on these activities using economics

perspectives and econometrics tools to analyze trends,

characteristics of pollution treatment and the

determinants of environmental success are sparse

This paper therefore attempts to contributes to fill this

knowledge gap, shedding the light on three

environmental issues of manufacturing firm in

Vietnam

Pollution abatement financial and personal efforts o by firm size and ownership

The successful degree of pollution control The distinctive factors influencing pollution abatement success

The paper is organized as the following The second part presents the conceptual framework, data and method of the research The next part highlights the features of pollution abatement attempts of manufacturing firms by firm sizes and ownerships The last part is devoted to explain why environmental protection efforts achieve varying results and give policy implications

2 Conceptual framework, data and method

2.1 Conceptual framework Firm environmental performance captures diverse

environmental protection actions of firms despite somewhat differences among scholars In this study the concept is defined as firm’s all activities abating pollution caused by its production and the corresponding results with respect to meeting domestic of international environmental protection standards

Firm environmental effort new sub-concept introduced in this paper to term firm’s environmental responsiveness in the context of developing countries, comprises two major types of firm environmental protection activities The first is financial effort, measured by ratio of firm’s total expenditure on pollution treatment equipments and environmental regular cost over total capital The second component

is personal effort, measured by ratio of firm’s number

of environmental staff over total number of employee

2.2 Data and methods Data: The newest data of the environmental session

in the annual enterprise survey conducted by Vietnam General Statistical Office (GSO) since 2000 with both technical and financial assistance of World Ban It covers around 5000 manufacturing firms in Vietnam, accounting for 15 percent of the population in the year 2009 The surveyed firms were selected proportionally to all three sectors and fifteen types of firm ownership by classified of GSO, to all twenty two two-digit manufacturing industries classified by

UNIDO, revision 3, and to all 64 provinces of

Vietnam Such selection excludes the bias of results

from comparative analysis by firm size and

ownership caused by the possible impact of industry

or province characteristics Econometrics models

merely employ 2317 observations or firms with

positive environmental expenditure

Method: The comparative analysis method is used to

identify the features of pollution abatement and

corresponding results by different firm sizes and

ownerships The indicators and measurements of firm

size and ownerships are used according to Vietnam

government decisions, enabling research findings and

policy implications to be more likely informed and

selected by policy makers and deciders

Regression models are used to investigate factors

affecting of environment protections success and their

impacts

GOVCER = f (SIZE, OWN, IND, EMIT, FINANEF,

TOECOST, EMS, ESTAFF)

ISOCERT = f(SIZE, OWN, IND, EMIT, FINANEF,

TOECOST, EMS, ESTAFF,GOVCERT)

GOVCERT is dummy one, being 1 if firm is

government environment certified; being 0 otherwise;

ISOCERT is dummy one, being 1 if firm is ISO

14001certified; being 0 otherwise

Firm characteristics

SIZE1: Firm size measured by number of employee,

SIZE2: measured by capital

OWN: Firm ownership, includes three sectors SOE:

State-owned enterprise; NSOE: Non-state owned enterprise; FIE: Foreign investment enterprise IND: Industry in which firm operates, includes three

types BASIND: Basic-good industry; INTERIND:

Intermediate-good industry; CAPIND: Capital-good

industry All ownership- and industry- relating variables are dummy ones, being 1 if firm belongs stated- ownership or industry ; being 0 otherwise Emission types; measured by the volume of

emission

FLUEMIT: Fluid ; SMOEMIT: Smoke; SOLEMIT: Solid

Finance factors:

FINANEF: Financial effort = (pollution abatement

equipment expenditure + environmental regular expenditure)/total firm capital

TOECOST: Total environmental protection cost =

pollution abatement equipment expenditure + environmental regular expenditure Environmental management:

EMS: dummy variable; being 1 if environmental

management system presents in firm, being 0 otherwise

ESTAFF: dummy variable, being 1 if there is

environmental staff in firm; being 0 otherwise

3.1 Environmental performance of manufacturing firms in Vietnam

Table1 Mean environmental efforts and result by firm ownership, 2009

firm capital labor ficate ficate

Limited with >50% state capital 115 0.018 0.009 58.3 17.4

Joint-stock with state capital 181 0.024 0.014 54.7 13.3

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Joint-venture with local private 57 0.013 0.019 54.4 14

Source: Author’s calculation from GSO survey

3.1.1 Environment protection performance by ownership

The table 1 presents pollution abatement expenditure

ratios and corresponding results of manufacturing firm

by ownerships in the year 2009, revealing two first

striking features

First, there emerged significant differentials of relative

pollution abatement expenditures and results between

ownership sectors and even within a sector, especially

with respect to obtaining ISO 14001 certificate Mean

ratio of environmental staff over total employee

(personal effort) for non-SOEs sector was nearly double

for SOEs and FIEs In contrast, mean environmental

expenditure over total capital ratio (financial effort) of

FIEs was merely about three-quarter all domestic firm

types At firm-level, given firm’s limited capital on the

average, the environmental effort gap is dramatically

widened up to four-times in financial term between the

private and the central limited SOEs and even nearly

nine times in term of ISO certification between

collective and FIEs joint-venture with SOEs

In addition, the nearly three-hundred-percentage

disparity of relative financial investment emerged within

SOEs sector between local limited and local traditional,

and within non-SOEs between private limited and

private In respect to environmental protection result, in

the non-SOEs sector, the number of ISO certifications

awarded to the joint-stock with state capital was

approximately three times as many as the collective and

the private

The second interesting feature of environmental

performance of manufacturing firms is the markedly

contrasting magnitudes between financial or personal

efforts and the success degrees when comparing

SOEs to SOEs or FIEs Of three ownership sectors,

non-SOEs’ personal and financial ratios emerged as the

highest, nevertheless its percentages of firms becoming

governmental or ISO 14001 certified turned out to be the

lowest Of firm ownerships, such a contradictory invest-result was the largest between the collective and central SOEs limited, with the former indicating two-times higher than the latter for financial ratio plus a larger personal ratio, but nearly eight-time and three-time– lower number of 14001 ISO and government certification correspondingly Accordingly, it is evident that being limited by financial capability, non-SOEs in general and the collective and private in particular stood

as the least-clean despite their largest environmental expenditure ratio across sectors and firm ownerships In contrast, lesser environmental investment but more success were found for SOEs, FIEs at sector level and the central limited SOEs, joint-venture with state capital, joint-stock with state capital at firm-level It should be emphasized that with a very low ISO certificate rate of only 2.8%, compared to 22.9 % recognized by Vietnamese government, non-SOEs firms were far from meeting international environment standards

The above findings suggest the considerable impact of ownership types on environment performance in general and the positive role of all state-relating firm ownerships for success in particular Also, these results raise question why the degrees of firm’s environmental effort have been not consistent with the success?

3.1.2 Environment performance of firm by size

The environmental performance features of different firm sizes, reported in the table 1, are relatively similar to those analyzed from table 2 with various financial and personal investments of firm sizes and the opposite relative investment-success of small and medium enterprises (SMEs) as compared to large enterprises Both financial and personal pollution abatement efforts decreased while the success percentage increased with firm size These trends are logical and consistent with analysis by firm ownership since SMEs account for a substantially larger portion of non-SOEs than that of

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SOE and FIEs, about 95 % and over 85 % correspondingly

Table2 Mean protection environment expenditure ratio and result by firm size, 2009

(No of labor) firm capital labor ficate ficate

Large

Total 4091 0.015 0.01 37.3 9

Source: Author’s calculation from GSO survey

The degree of such a contradictory between firm

sizes was much sharper than between firm

ownerships by both success indicators The largest

enterprises’ average financial effort government as

well as ISO environmental certificate was

respectively nearly 6 times and even up

approximately 20 times higher than that of the

latter These results strongly suggest that firm size

affected achieving clean production even more

substantially than the degree of environmental

investment and especially on firm’s successful

scale of pollution treatment

4 Explanations for environmental protection

success of manufacturing firms

4.1 The abatement expenditure-emission volume

relationship approach

It is generally supposed that firm’ emission volume

is proportionally increased with the production

scale or its size, therefore it is not necessary for

firms to over-expend to treat their production

pollution In other words, a firm’ environmental

abatement cost extent should be consistently

increased with its size or production, disposal scale

But why do SMEs and non-SOEs had the highest

environmental expenditure rate but lower

successful degree? We introduce here the first

explanation from the view of emission-abatement expenditure relationship

As it occurred in many developing countries, in Vietnam virtually all pollution abating equipments have to be imported from the advanced high-income, therefore incur a large expenditure relative

to average financial capacity of SMEs and a higher environmental cost-total capital ratio compared to large enterprises Nevertheless, the matter here is that such investment is still not sufficiently large, proportional to their emission volume

To support numerically the above arguments, we estimate and consequently compare the ratio of mean total emission treatment cost of each firm sizes or ownership to the ratio of mean volume of each emission type since it is impossible to aggregate fluid, air and solid emission in to a figure with a common measurement These rates are presented in Table 3 with the SMEs – LEs ratio by financial investment being higher than that by solid disposal volume, 4.8 % against 1.86%, but lower by fluid or smoke rate (7.85

%, 5.2 %) In addition absolute magnitude of the former emission type was substantially smaller than each later In other words, average SMEs-LEs rate in term of environmental financial effort was lower than that in term of emission volume, explaining why SMEs

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were less successful in pollution treatment despite their

greater attempt relative to financial capability Similar

contradictory results and correspondent explanation are

appropriate in the comparative cases of non-SOEs and SOEs, ex-small and ex-large enterprises

Table3 The mean pollution abatement cost and emission volume by firm types

Mean

Firm type Rate

Pollution

abatement expenditure

Ex-Small

Ex-Large

non-SOEs FIEs

Source: Author’s calculation from GSO survey

4.2 Regression approach

Table 4 reports the regression results of factors

affecting firm’s success in pollution treatment,

indicated by receiving environmental protection

certifications or ISO 14001 certificate

Firm characteristics have considerable impacts on

its environmental success Firm size measured by number of employee, has little effect despite its statistic significance at 5 % for ISO obtaining However, with capital measurement, firm size affects strongly obtaining both certificates and significantly statistical for ISO 14001 award

Table4 Logistic regression on determinants of firm’s pollution control success

Dependent Variable Being Environmentally Certified

Note: Level of significance *10%;**5%;***1%

Firm ownership types have relatively strong

influence on environmental result with similar

positive significant impact from the

foreign-owned on firm meeting domestic as well as

international standards This supports arguments

that foreign firms generally bring to the host

country not only more modern technology,

management skill but also environmental

responsibility culture The state ownership helps

firm more likely be familiar and comply to

government environmental regulations but its

positive impact on meeting international standard

is not significant In contrast to FIEs, collective

and private ownership (non-SOEs) strongly and

significantly affect firm’s success in pollution

abatements These results, combining with those

identified in the previous session, imply that in

spite of their considerable efforts, non-SOEs have

to invest more effectively on pollution treatment

to the extent that absolute abatement expenditure

is adequately large relative to firms’ emission volume

Firm ownership types have relatively strong influence on environmental result with similar positive significant impact from the foreign-owned on firm meeting domestic as well as international standards This supports arguments that foreign firms generally bring to the host country not only more modern technology, management skill but also environmental responsibility culture The state ownership helps firm more likely be familiar and comply to government environmental regulations but its positive impact on meeting international standard

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is not significant In contrast to FIEs, collective

and private ownership (non-SOEs) strongly and

significantly affect firm’s success in pollution

abatements These results, combining with those

identified in the previous session, imply that in

spite of their considerable efforts, non-SOEs have

to invest more effectively on pollution treatment

to the extent that absolute abatement expenditure

is adequately large relative to firms’ emission

volume

Industry in which firm operates has insignificant

statistical coefficient on environmental success by

both indicators, beyond that of capital-good

industry on meeting ISO14001 requirements,

The emission magnitudes in either form has the

largest and negative effects on firm’s pollution

treatment success except two relationships, fluid

and government certificate or smoke emission and

ISO certification correspondingly But the positive

signs of coefficients in these cases are not

significant Solid disposal volume is found to be

the largest and the most highly significant

constraint for manufacturing firms to become

environmentally governmental certified

Similarly, fluid emission extent comes out clearly

to be the highest barrier for being ISO14001

certified In other words, the manufacturing firms

in Vietnam are still limited in treatment of two

these emission types as required correspondingly

by Vietnam environmental standards and ISO

14001 criterion

Contrary to the normal thinking both relative

financial investment has not only significant

impact on firm’s insignificant pollution treatment

success The environmental expenditure-capital

rate has only positive impact relationship with

government certificate but this factor and even

total or absolute abatement cost has negative

correlations and with firm’s environmental

success by both indicators Such coefficients helps

majorly explain the opposition between pollution

treating success and relative financial effort of

firms when comparing non-SOEs and SOEs,

SMEs and LEs as indicated in the previous session These results also imply that the spending

way is more important than the amount of

expenditure in achieving pollution treatment target, especially on the average firm’s absolute financial investment is still considerably low as compared to that in developed economies

The findings on environmental management system supports to the above financial implications EMS is found to be the most important explanatory variable for achieving pollution control success by both certification indicators Both dummy managerial variables, the presence of environmental staffs or environmental management system (EMS) have large, positive and distinctive on firm satisfying environmental protection domestic and international standards The strong, positive effect of obtaining environmental government on receiving ISO

14001 certificate imply that meeting pollution abatement domestic requirements is good consequent preparation for manufacturing firms to pursue and satisfy higher environmental criterion issued by international organizations

In addition to adding knowledge of pollution abatement characteristics of various firm types by size and by ownership in the case of Vietnam, our study’s finding share similarities with the previous studies on the determinants of firm environmental success These comprise the strongest impact of environmental management system, the driving force of firm size, foreign firms, the cleaner public ownership compared to the local private, the support from satisfying local government regulation for meeting international environmental standard and the insignificant effect from features of industry or firm’s manufacturing technology However, despite an emphasis of the emission volume as one of the main barrier (the fluid for FIEs and the solid one for SOEs), contrary to normal thinking and the results form study by Earnhart and Lizal (2007), one of our study results questions the driving role

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of financial investment for firm’s pollution control

achievements This therefore strongly

recommends the further studies on this important

and disputable topic

5 Conclusion

Manufacturing firms in Vietnam have made

considerable attempts to control pollution given

their small financial resource compared to

counterparts in the world, even those in South

East Asian regional countries In term of financial

effort (abatement cost/total capital) or personal

effort (environmental staff/total labor), the greater

was SMEs and non-SOEs rather than large

enterprises and SOEs or FIEs Nonetheless, with

respect to environmental successes, the results are

contrasting, with a substantially larger number of

LEs, SOEs, FIEs becoming domestically or

internationally environmental certified or

achieving both standard levels

The contradictory features between environmental

protection efforts and results are firstly explained

by the fact that in spite of a larger abatement

expenditure relative to capital of SMEs or private

local firm, it still not sufficiently large to the

emission magnitude released from their

production Solid, fluid emission volume, private

ownership affects negatively and significantly on

firm being verified environmentally responsive

while environmental management factors, either

being personal or organization, are the positive

and strong determinants of achieving government

as well as ISO certification Reaching domestic

environmental protection levels is markedly

enables firm to achieve that by international

standards The amount of environmental

expenditure either in relative or absolute term is

less important than the managerial method and

human factor for success in pollution control of

manufacturing firms in Vietnam whereas

non-SOEs or small enterprises’ abatement spending

needs to increase proportionally to their emission

volume

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