Monday, October 27, 2008

Wal-Mart and environmental spillovers

There is a recent literature to which I have contributed looking at the idea of "environmental spillovers". This is the idea that the environments of developing countries can benefit from foreign multinationals due to spillovers of knowledge and technology.

These include customer to supplier, supplier to customer or supplier to supplier.

Here is a link to our paper.

In Search of Environmental Spillovers

Facundo Albornoz
University of Birmingham
Matthew A. Cole
University of Birmingham - Department of Economics
Robert J.R. Elliott
University of Birmingham - Department of Economics
Marco Ercolani
University of Birmingham - Department of Economics


There is an extensive literature that examines the relationship between foreign direct investment (FDI) and the productivity and competitiveness of domestic firms. Using estimation techniques from the productivity spillover literature, this paper tests for the presence of environmental spillovers from foreign firms. On the basis that foreign owned firms may encourage firms in their extended supply chain to improve their environment related management practices, evidence for the existence of environmental spillovers should be easier to find than productivity spillovers where firms naturally attempt to minimize intra-industry knowledge leakage. In this paper we show that first, foreign owned firms are more likely to implement environmental management systems (EMS) and second, that the presence of foreign owned firms in those sectors that a firm supplies can encourage good environmental practice. This is especially true if a firm is foreign, has high absorptive capacity, and operates in the presence of formal and informal networks.

Keywords: Multinationals, Environment, Firm Characteristics, Spillovers

JEL Classifications: D21, Q20, Q56
Working Paper Series

The anecdotal evidence has always been visible as this story about Wal-mart demonstrates. Finding whether such stories have any real economic impact is another ball game entirely. It is clear that suppliers to Wal-Mart to not like it - why would they if costs increase. The key is whether Wal-Mart are offering any help to improve such as advice or advisors.

Wal-Mart in China standards driven [FT]

Wal-Mart (NYSE:WMT) , the world's biggest retailer, on Wednesday told its Chinese suppliers to meet strict environmental and social standards or risk losing its business.

"Meeting social and environmental standards is not optional," Lee Scott, Wal-Mart's chief executive, told a gathering of more than 1,000 suppliers in Beijing.

"A company that cheats on overtime and on the age of its labour, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honour its contracts - will ultimately cheat on the quality of its products."

Wal-Mart has been pursuing a drive to improve its reputation on environmental and social issues over the past three years, in response to growing criticism in the US over issues including labour conditions in its supplier factories.

The directive, which will be codified in a Wal-Mart suppliers' agreement, comes at a difficult time for China-based manufacturers, caught between rising production costs and the effect of the global financial crisis on consumer demand in their largest overseas markets.

The requirements include a clear demonstration of compliance with Chinese environmental laws, a 20 per cent improvement in energy efficiency at the company's 200 largest China suppliers, and disclosure of the names and addresses of every factory involved in the production process. The company will require a 25 per cent rise in the efficiency of energy-intensive products, such as flat-screen TVs, by 2011.

Mr Scott said the retailer also wanted to move away from the short-term focus that has characterised its relationships with Asian suppliers.

"We have traditionally purchased in a very transactional manner," said Mr Scott. "We need deeper, longer-term relationships with suppliers so it is not based on the last penny."

Some suppliers grumbled about the conditions spelled out by Wal-Mart, which has a reputation for driving hard bargains. It is estimated that each year the company sells about $30bn-worth of China-made goods, giving it enormous negotiating power over suppliers. "It's going to make things a lot worse," said one manufacturer at the meeting, who asked not to be identified. Others were more relaxed. "If they don't like it, they are not going to be doing business with Wal-Mart," said one US-based Wal-Mart supplier who sources components from China.


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