An Institutional and Resource-Based View on MNE's Involvement in Climate Change Mitigation

Written by Alexis Raedemaecker

While the need of large-scale solutions to mitigate climate change and other environmental issues is becoming increasingly urgent, analyzing the current international business (IB) landscape may lead one to notice a lack of multinational enterprises’ (MNEs) activism in strategically mitigating climate change on a regular basis. If many blame MNEs for not being active enough towards becoming fully environmental-friendly, one must be aware that they are operating in a complex and heterogenous institutional environment that constrains their range of actions and the way in which they deploy their resources and capabilities.

This short note first deals with how MNEs interact with the nexus of institutions in which they are embedded. Second, it adopts a resource-based view (RBV) to depict how firms strategize their resources and capabilities’ deployment in climate-change related courses of action, and how their market and institutional contexts shape the risks they face in doing that. Third, it shortly synthesizes some findings in the IB literature on the relation between firms’ climate-related policies and their economic performance.

I. Institutional failure and embeddedness

If climate-related issues are at the core of our societies’ preoccupations, most firms still treat their environmental footprint as an externality and their impact is seldom factored in into daily decision-making processes.

In addition to the absence of an enforceable global agreement, a reason for that might be related to the fact that climate change has not yet led to a “market morality”; an expression that denotes the set of ethical norms MNEs would imperatively need to implement either because it is a necessity for the very purpose of surviving or because it confers advantages that enhance its economic success (Pinkse & Kolk, 2012). Given the lack of MNE responsiveness to these pressing societal issues, there is a strong need for policy makers to design a political and legal context that will lead the path towards a cleaner future.

From an institutional perspective, however, one cannot deny that the current setting is marked by a plethora of institutional voids in managing environmental challenges (Acheson, 2006). A plausible explanation for this global failure to set the right political and legal contexts in mitigating climate change may be a consequence of different stances on the issues at stake across countries. For example, Doh & Guay (2006) suggest that institutional variation in Europe and in the US has resulted in different interpretations on how corporate social responsibility issues (CSR) should be integrated into the policy-making processes. For their part, Pinkse & Kolk (2008) pinpoint this issue of institutional fragmentation as well and link it to how firms behave in acting against environmental depletion. They contend that if it were to be perceived as a global issue, then firms would strategize on alleviating it at the highest possible level of decision making, i.e. at their headquarters (HQ). This is because they believe that the consequences will impact them globally. Yet the fragmentation of institutional contexts worldwide does not help MNEs to perceive the issue as being global. Instead, they organize regionally to respond to differing local institutional pressures and this localized decision-making significantly decreases the likelihood that environmental friendliness will have a significant strategic impact overall. Barriers to developing a climate strategy for MNEs are thus strong as they are confronted with often conflicting pressures coming from the varied contexts in which they operate (Kolk & Levy, 2003).

Even if effective institutions are needed to set the right context for firms to properly act upon climate change mitigation, those MNEs that are at the same time at the forefront in the tackling of climate change are themselves a centrepiece in designing the very institutions that constrain them. In fact, it is increasingly common for those large leading MNEs to elaborate on CSR-based codes of conduct that regulate their operations. Whatever the reasons underlying the implementation of those codes (e.g. liability of positive societal impact, corporate image, control over partners, or even greenwashing), they can be interpreted as an attempt to fill institutional voids and as a strategy to harmonize the firm’s behaviour across the different countries in which it operates (Kolk & van Tulder, 2005). One could also think of these codes as a means to inspire policy-makers and thereby influence the design of climate change policies in the way that best fits the corporations.

II. A resource-based view

Aside from the institutional context in which MNEs are embedded, their set of resources and capabilities plays a crucial role in assessing how they tackle these grand challenges. Even if organizations were pushed to act in some specific way by the institutions guiding their behaviour, every single firm is constrained by its own set of resources and capabilities and the interplay between the institutional context and the resource-base affects how climate change issues are integrated into strategies (Amran et al., 2016). Addressing environmental issues comes with much uncertainty for MNEs because of, amongst other things, consistently changing stakeholders’ expectations (Pinkse & Kolk, 2008). Therefore, not all MNEs will react in the same way to institutional pressures and will deploy their resources and capabilities in environmental activities differently. Rugman & Verbeke (1998) suggest that strategic resource commitments to improving an MNE’s environmental footprint are contingent on the creation of green firm-specific advantages (FSAs), a firm’s bundle of assets and its capabilities in coordinating and controlling them. On their side, Pinkse & Kolk (2008) state that this depends on the leveraging potential of resource commitments as well as on their flexibility in terms of reversibility. That is, environmental commitments can be seen as leading to green FSAs if they advance both environmental and industrial performance, and if mistakes regarding these commitments can be easily corrected (Pinkse & Kolk, 2008).

In their paper dealing with how some US and European MNEs respond to the global climate change issue, Kolk & Levy (2003) also acknowledge the relevance of firm-specific endowments in explaining environmental management differences. More specifically, they find the following components to be powerful explanatory factors for corporate positions on climate change. First, they note that an MNE’s economic situation, positioning, corporate culture, and history of involvement with technological alternatives are among those factors. Second, the degree of centralization has also some explanatory power. This is consistent with the argument mentioned earlier stating that institutional fragmentation incentivizes firms to adopt local responses instead of strategic global ones at the HQ level. Third, they note that the degree of internationalization of the top-management layer has an impact on climate change management. This has also been empirically supported by Amran et al. (2016) as their study shows a significant relationship between the extent of a board of directors’ (BoD) international experience and their firm’s climate change business strategy.

An important point to highlight is the fact that climate-induced investments entail a large amount of risk. In addition to the bulk of uncertainties inherent to the future of international climate policy, the fact that the future prevailing climate-friendly technologies are unknown makes the risk of making an irreversible green mistake quite high (Pinkse & Kolk, 2008). Engaging in R&D investments for products and processes showcasing a low environmental footprint seems thus to be extremely risky, and firms therefore need to carefully consider how they strategize they resource deployment and utilization (Kolk & Levy, 2003). Though challenging, managing these risks properly is not infeasible. Risk-mitigation and management strategies are often based on influencing and fixing the rules of the game. That is, MNEs try to remove a degree of freedom in how the situation will evolve by, for instance, engaging in dialogue-based collaborations with non-governmental organizations (Kourula, 2010) and/or by implementing codes of conduct attempting to set and fix global standards (Kolk & van Tulder, 2005). They can also engage in collaborative investments with competitors or supply chain partners so as to accelerate R&D investments and share the risks (Philibert, 2004).

III. On the link between climate change mitigation and competitiveness

An important factor in explaining MNEs’ behaviour regarding climate-change mitigation is the potential benefits they may reap by being environmental-friendly. We highlighted some of the main institutional and internal barriers to the implementation of such friendly policies in the previous sections. But while insufficient efforts are being made at the moment, we can still witness an increased activism among the leading MNEs. Aside from a possible willingness to impact societies responsibly, the IB literature shows that it is economically interesting for firms to adopt such practices. An investigation from Chakrabarty & Wang (2012), for instance, empirically depicts that implementing climate change mitigation policies can enhance firms competitiveness by increasing their sales effectiveness (the ability to efficiently attract customers) and product leadership (strengths of a firm’s products, which make it an industry leader). They also note that this effect is even more pronounced for largely internationalized firms (i.e. MNEs). Doh & Guay (2006) support the fact that firms can do well while doing good. They indeed contend that effective stakeholder management (including environmental NGOs) can be a source of competitive advantage and may thereby yield economic and social benefits together. Pinkse & Kolk (2008) point at the strategic impact of climate change on growth, survival and performance too. The concept of green FSAs of Rugman & Verbeke (1998) they use is itself based on the fact that strategic resource commitments to tackle environmental issues are made contingently on their potential to improve performance. These examples are just a drop in the ocean of papers linking environmental friendliness and economic and competitive performance.

IV. A final note on MNEs’ contextual behaviour in mitigating climate change

The previous sections synthesize several papers in the IB literature that analyze MNEs’ responsiveness to issues related to climate change. This short note may help one recognize the inherent complexity of the very context underlying MNEs’ strategies to mitigate climate change, whether this complexity is internal (i.e. from an RBV) or external (i.e. from an institutional perspective). In fact, while IB scholars widely agree on the positive strategic and economic impacts of environmental friendliness, the understanding of these complex constraints and how they interplay with one another leads me to adopt a more critical and knowledgeable view and opinion on the actions taken (or not taken) by MNEs to enhance their environmental sustainability.

Sources:

Acheson, J. M. (2006). Institutional failure in resource management. The annual review of anthropology, 35, 117-134.

Amran, A., Ooi, S. K., Wong, C. Y., & Hashim, F. (2016). Business Strategy for Climate Change: An ASEAN Perspective. Corporate Social Responsibility and Environmental Management, 23, 213-227.

Chakrabarty, S., & Wang, L. (2012). Climate Change Mitigation and Internationalization: The Competitiveness of Multinational Corporations. Thunderbird International Business Review, 55(6), 673-688.

Doh, J. P., & Guay, T. R. (2006). Corporate Social Responsibility, Public Policy, and NGO Activism in Europe and the United States: An Institutional-Stakeholder Perspective. Journal of Management Studies, 43(1).

Kolk, A., & Levy, D. (2003). Multinationals and global climate change: issues for the automotive and oil industries. Multinationals, environment and global competition, pp. 171-193.

Kolk, A., & van Tulder, R. (2005). Setting new global rules? TNCs and codes of conduct. Transnational Corporations, 14(3), 1-17.

Kourula, A. (2010). Corporate engagement with non-governmental organizations in different institutional contexts—A case study of a forest products company. Journal of World Business, 45, 395-404.

Philibert, C. (2004). International energy technology collaboration and climate change mitigation. OECD.

Pinkse, J., & Kolk, A. (2008). A perspective on multinational enterprises and climate change: Learning from ‘‘an inconvenient truth’’? Journal of International Business Studies, 39, 1359-1378.

Pinkse, J., & Kolk, A. (2012). Multinational enterprises and climate change: Exploring institutional failures and embeddedness. Journal of Intenational Business Studies, 43, 332-341.

Rugman, A. M., & Verbeke, A. (1998). Corporate strategies and environmental regulations: an organizing framework. Strategic Management Journal, 19, 363-375.