Explaining environmental management in Central and Eastern Europe.

Bluffstone, Randall ; Sterner, Thomas

INTRODUCTION

Late in the 20th century, a historic series of events caused the downfall of the economic system of planning that characterised the Soviet Union and Central and Eastern Europe (CEE) for as much as 70 years. We examine the environmental behaviour of industrial firms approximately 8 years after this collapse. The main aim of the paper is to understand the economic and social transition factors that spurred environmental management systems (EMSs) that are believed to have contributed to the generally positive environmental changes that have been observed in the region. Because the transitions in CEE countries have been so large and dramatic, understanding what factors spur adoption of EMSs could yield important lessons for other countries, many of which are undergoing some degree of transition away from reliance on governments to allocate economic resources.

Bulgaria, Hungary, Lithuania, Poland, Romania and Slovakia are examined in this paper. In all these countries, the transitions began during 1989-1991 and in 1998, which is when our data were collected, all were associate members of the European Union (EU). Hungary, Lithuania, Poland and Slovakia were admitted to the EU in 2004 and the remaining two countries are associate members. We particularly look at the effects of privatisation, export orientation, public pressure and environmental regulation on environmental behaviour in industrial firms that are likely to have serious pollution problems. EAP Task Force (1998) notes that nonferrous metallurgy, iron and steel, pulp and paper and chemicals may have particularly dramatic effects on human health. We focus on enterprises in these sectors, as well as energy and mining firms.

The following section reviews the relevant literature on the relationship between the transitions to market economies and environmental outcomes. The section also reviews the literature on adoption of EMSs. The further section discusses the data and empirical approach. The penultimate section presents the results and the last section concludes.

ENVIRONMENT, TRANSITION AND ADOPTION OF EMSs

Some proponents of the planned economic systems in CEE countries believed there would be less pollution in economies not driven by the profit motive, because planners would (or at least could) take into account all costs and benefits. In fact, the opposite appears to have been a closer description, because prior to the economic transitions, CEE countries were known for severe pollution (Ahlander, 1994; Environment for Europe, 1994; Hughes, 1991; Wilczynski, 1990; Carter and Turnock, 1993; Chandler, 2000, p. 23).

Under central planning, the well-known bias towards heavy industry combined with a lack of incentives to economise on inputs created considerable waste and pollution (Hughes, 1991; Chandler, 2000, p.139; Carter and Turnock, 1993, p.4). As a consequence, CEE countries emitted much more pollution per unit of GDP and per person than OECD countries. The planned economies in Europe, for example, averaged 13 times more particulates per capita than the EU and three times more wastewater emissions in 1980. SO2 emissions per capita were on average twice that of the EU (EAP Task Force, 1998; Wilczynski, 1990).

The economic transitions in CEE countries greatly reduced stationary source air and water pollution. For example, in the Slovak Republic emissions of particulate matter (an important air pollutant) by stationary sources declined 80% during the 8 years between 1990 and 1997. S[O.sub.2] emissions fell by over 60% and N[O.sub.x] declined 45% during 1990-1997 (Ministry of Environment of the Slovak Republic, 1998). The story is the same for water pollution. In Lithuania, for example, industrial emissions of chrome and copper declined by 65%-70% during 1989-1994 alone. Biological oxygen demand in surface waters fell by about 90% during the 1990s (Ministry of Environment of Lithuania, 2001).

Hypotheses abound regarding the causes of these improvements, but little empirical work--particularly at the firm level--has been done to identify the most important factors. Perhaps, the most often noted change that is believed to have contributed to improved environmental quality is the large decline in industrial output (Hughes and Lovei, 1999). This explanation alone is probably insufficient since there are many other factors that may have contributed to improved performance. For example, improved environmental performance is likely to be related to adoption and implementation of EMSs, which may be spurred by a variety of transition factors, and could include development of environmental plans, establishment of environmental departments, adoption of environmental audit, waste minimisation and pollution prevention programmes and more frequent monitoring of air and water pollution emissions. Anton, Deltas and Khanna (2004), for example, find that firms with more comprehensive EMSs had lower toxic releases per unit of sales. Newbold (2006) finds that adoption of EMSs in the Chilean mining sector improves firms' environmental performance. Nash and Ehrenfeld (2001) note several examples where adoption of EMSs likely improved environmental performance in US firms. King and Lenox (2001) find that firms with ISO 9001 certification had better environmental performance than other firms.

The use of EMSs is widespread and they have been adopted for a variety of reasons. McKinsey and Company (1991) find that 79% of respondents to a survey of 400 senior managers of international firms reported they utilised such methods. Some of these programmes are very formal and follow rules specified by outside organisations. One example is the set of measures required for International Standards Organisation 14000 series certification. ISO 14001 focuses primarily on environmental practices and includes the elements of environmental planning, monitoring and assessment. In addition to being potentially useful tools for management, ISO 14001 certification can send consumers important signals about firm-level production processes and therefore offer real public relations value (Boiral and Sala, 1998; Clapp, 2001). Bellesi et al. (2005), for example, find that EU importers put great weight on ISO 14001 certification in choosing export partners. King and Lenox (2001) suggest that cost savings are also important, because of their finding that US firms with ISO 140001 certification tended to also have ISO 9001 certification, which deals with product quality.

A number of authors have analysed the adoption of EMSs outside the ISO context. Henriques and Sadorsky (1996) find the factors behind the existence of environmental plans in Canadian firms are type of sector, ownership structure and the existence of outside pressure from consumers, investors, community or government. These findings are consistent with those of Benito and Benito (2005), who see demand-side benefits as key drivers of better environmental behaviour. They also note that firms use EMSs for more effective regulatory compliance and cost savings. Khanna and Anton (2002) find that fear of liabilities, public pressure and threats of high-cost regulation cause firms to adopt EMSs. They also note that solid regulatory regimens underlie incentives. Anton et al. (2004) find that market pressures from consumers, investors and competitors prompt adoption.

Several papers also find that public disclosure of information on firm pollution can stimulate better environmental outcomes and behaviour, potentially including adoption of EMSs (Sterner, 2003). Konar and Cohen (1997) find that firms with adverse disclosures publicised in the USEPA Toxics Release Inventory had bigger declines in toxic emissions than other firms. In an evaluation of the USEPA 33/50 Program, Arora and Cason (1996) found that competitiveness was likely an important motivator for participation and reductions achieved did not substitute for other measures. Wang (2000) shows, in an econometric study, that both formal regulation and community pressure lead to water pollution reduction in China.

There are, however, so many more changes occurring in CEE countries than is typically captured in the study settings analysed. This changing environment offers the opportunity to look at the fundamental drivers of EMS adoption. For example, in CEE countries, the creation of functioning markets, facilitated by privatisation, dramatically increased competitive pressures and incentives for efficiency. Brown et al. (2006) find, for example, that privatisation of manufacturing firms is associated with 15%-50% increases in productivity in Romania and 8%-28% in Hungary.

Another outcome of the transition was the development of international commercial contacts, such as foreign direct investment (FDI) and trade with high-income market economies. CEE countries experienced significant FDI during the transition, with an estimated $70 billion flowing into the region in the 1990s. Hungary, for example, received over $16 billion in foreign investment during the decade, with annual investment averaging 4 %-5 % of GDP. FDI could have important environmental implications. As noted by Klavens and Zamparutti (1995) and Environment for Europe (1994), in a survey of 1,000 potential foreign corporate investors, over three-quarters said they utilised corporate or headquarter country environmental management standards when they were stricter than those in their countries of investment. FDI could therefore bring with it EMSs. Relatively little literature exists on the relationship between country of ownership and environmental behaviour. Collins and Harris (2002) analyse a sample of UK metal manufacturing plants and find that foreign-owned plants were more likely to invest in pollution abatement and invested more than plants that were purely domestic.

CEE firms also dramatically increased their foreign trade. Growth in total export earnings averaged almost 9% during 1993-98, with the share of exports to the West increasing to 67% by 1999. These results suggest that CEE countries were increasingly looking outward and westward for markets (World Bank, 2000). Increased trade with western countries could also spur adoption of EMSs. Quality standards are often higher in western markets and those standards can typically only be met using improved technologies mediated by EMSs (Andonova, 2003). Consumers in Western Europe and other high-income countries often prefer products manufactured using environmentally benign methods, but have little direct information on these processes. Firms with higher foreign trade shares may therefore adopt EMSs to signal that green production methods were used (Bellesi et al., 2005).

The creation of civil societies and increased environmental information may also have important, positive effects on adoption of EMSs. We know from the literature on voluntary environmental agreements and environmental information that increasing the availability of public information on the environmental performance of firms can affect firms' behaviour. This literature is especially relevant for CEE countries, because prior to 1989, there was very little public information available about firms' pollution. Environmental impact assessment results are now generally public and most countries enforce the public's right to know about activities that damage the environment. Prior to the transition, there were also very few non-governmental environmental advocacy groups to help translate public information into community pressure. By 1997, however, the Regional Environment Center headquartered in Budapest had identified 3,000 environmental NGOs working for improved environmental quality in the CEE region.

Improved civil society is complemented by improved environmental policies. Ministries of environment were established during the first half of the 1990s where they did not previously exist, environmental inspectorates were strengthened and the generally adversarial relationships between regulator and regulated that are familiar in the West were established in most countries. Ambient and emissions monitoring systems were also put in place or strengthened. Pollution charge systems were also improved, offering incentives for better performance (Bluffstone and Larson, 1997).

EMPIRICAL APPROACH AND DATA

In 1998, the Harvard Institute for International Development at Harvard University conducted a survey of 2,393 firms in Bulgaria (404 firms), Hungary (379 firms), Lithuania (366 firms), Poland (536 firms), Romania (654 firms) and Slovakia (54 firms), which provide the data used in this paper. These countries represent a wide variety of cultures and transition experiences, with Hungary and Poland considered the most advanced in terms of private sector development, followed by Lithuania and Slovakia and then Romania and Bulgaria.

The data were gathered by professional research firms or institutes that either had substantial experience in environmental economics research or specialised in survey implementation. The sample was stratified to include only firms operating in industries that are generally highly polluting and therefore are likely to face environmental management challenges. The four sectors examined in the present study are animal raising, mining, electric power and manufacturing. A list of industry sectors is provided in Table 1. The survey responses included data focusing on general firm characteristics, environmental management, environmental expenditures, environmental performance, regulatory enforcement, public awareness and community pressure. We examine the firm-level environmental management measures listed below, all of which were reported in 1998:

* Adoption of environmental audit, waste minimisation and pollution prevention programmes, which are programmes in which firms examine their production operations to reduce waste and pollution;

* establishment of environmental departments in firms;

* development of environmental plans by firms to improve environmental performance;

* ISO 14001 certification being sought or achieved;

* use of on-site wastewater treatment plants;

* existence of internal water and air pollution monitoring systems.

As shown in Table 2, over 40 % of the firms reported internal environmental audit, waste minimisation or pollution prevention (AWM&PP) programmes. Existence of environmental departments varied across countries, with only 17% of Hungarian firms having such institutions and 82% of Romanian firms having formal environmental departments. One-third to one-half of firms reported having environmental plans in place. In most countries, 15%-20% of firms reported taking steps toward ISO 14001 series certification, with participation in Romania and Slovakia higher. With the exception of Hungary, at least 30% of firms in each country had on-site wastewater treatment.

Internal emissions monitoring is a key element of any EMS, because it provides the basic information necessary for EMS operation. As shown in Table 3, most firms monitored their water pollution emissions quarterly or annually, but over one-third did not monitor water pollution emissions at all. Air pollution monitoring was even more problematic, with over 40% having no monitoring. In the analysis to follow, we examine the existence rather than frequency of internal monitoring, because so many firms do not monitor at all.

Table 4 lists the independent variables used in regressions and our reasons for including them. Of special interest are those focusing on economic transition, such as output, private sector ownership, FDI, exports, environmental regulatory measures and public information. We now discuss our independent variables in turn, including key descriptive statistics.

Firms with more output are larger and therefore may have more capacity to absorb fixed costs associated with EMSs. We therefore expect more output encourages EMS adoption. We do not have reliable output data for Bulgaria and Lithuania and therefore use 1997 employment as a proxy. For change in output, which takes account of the dynamics that occurred during the transition itself, we proxy with the ratio of 1997-1990 employment. Although the correlation between output and employment is reasonably high (p = 0.48), we recognise that in the CEE context change in employment is an imperfect proxy for change in output, because changes in employment are likely to also imply changes in efficiency. We therefore cannot draw inferences about the effect of changing output on adoption of EMSs from this variable, but we believe including employment and change in employment adequately conditions for both level and changes in output. Table 5 shows that on average firms in the sample had high levels of employment, but across the board 1990-1997 declines were large.

Most firms in the sample had mixed ownership structures made up of domestic private, government and foreign owners. We include in our regressions percentage of private, foreign and government ownership, with private domestic as the omitted variable. We see in Figure 1 that ownership structures varied somewhat across countries, with an average firm in Hungary largely being owned by private domestic investors with significant foreign participation. In most other countries, foreigners held relatively small shares and in Bulgaria and Romania government ownership was very significant.

[FIGURE 1 OMITTED]

To examine the importance of international exposure, we use both objective and subjective variables. Exports are measured as the percentages of firms' main products that were exported in 1997, as well as the portion of total exports that went to the EU. Managers also provided Likert-scale rankings (0-5, with 5 being the highest) for the importance of environmental norms and standards for selling goods in foreign markets as a motivator of improved environmental management. A similar Likert-scale variable focusing on requirements by suppliers and investors is also included. As shown in Table 6, firms in all countries increased their export shares and for countries that had limited shares in 1990, increases were quite dramatic. For example, on average Slovak firms increased their export share over 200% in 8 years. Lithuanian and Romanian firms increased their export shares by over 50%. Further, the composition of export destinations changed during the 1990s, with higher shares going to EU markets.

As found by Khanna and Anton (2002), more stringent environmental regulation and enforcement may also spur adoption of EMSs, particularly if firms face fines or other penalties for noncompliance. A vector of variables captures various aspects of monitoring and enforcement. The frequency of air and water pollution monitoring by regulatory agencies is the first such variable. We see from Table 7 that on average firms were monitored by regulatory authorities about every 5 months. Poland had essentially annual monitoring of water emissions and semi-annual for air pollution. No Polish firms reported going unchecked, which was not true for Bulgarian, Romanian and Slovak firms. Hungary, Poland and Romania put more emphasis on air pollution, with the other countries focusing on water protection.

Also included in our models is a dummy variable to indicate whether inspectors' visits are announced in advance. If visits are announced, inspectors are less likely to catch ongoing violations, because managers may have time to temporarily remedy problems before inspections take place. In the sample, 18.5 % of respondents reported that environmental inspections were generally announced, but the figure varied from 10% or less in Bulgaria and Poland to 45% in Slovakia. Even major firms may not ave formal environmental permits for all or part of their facilities, yet we know permits are critical for environmental monitoring and enforcement. To capture this potentially important aspect of environmental policy, we include a dummy variable for whether some or all facilities have permits.

To be effective, monitoring and enforcement must be realistic. Regulatory capacity in CEE countries is quite limited and therefore self-reporting of emissions (typically enforced with spot checks by inspectors), which is the norm in developed countries, rather than relying wholly on inspections for monitoring, is likely to be most appropriate. In the overall sample, 58.4% of firms self-reported their emissions and the percentage was as high as 75 % in Lithuania and as low as 46.3% in Hungary. A dummy variable is used to capture whether firm management self-reported its emissions to regulatory agencies in 1997.

The impacts of public information and open civil societies on firm environmental management are captured by two variables. A dummy variable indicates whether as of 1998 the firm or government agencies informed the public about pollution emissions by firms. In the full sample, 24% of firms say the public is informed about pollution emissions. In Romania, 47% of firms said their emissions were public, but in Hungary and Poland this was true for only 5 % and 8 % of firms. The second variable is a Likert-scale ranking for the importance of public pressure by environmental organisations and local communities as motivators of improved environmental management. This variable therefore focuses on managers' perceptions of the importance of public pressure. Managers report fairly modest effects on average (1.65 out of possible 5), although much stronger impacts seem to exist in Poland and Romania.

In addition to our policy variables, we include country dummies (Poland is the default) to adjust for country-specific factors not captured by transition variables. We also include dummies for all industries in Table 1, except animal raising, which is incorporated into the constant term. These dummies adjust for industry-specific effects. The variable 'Year in which Most Capital was Built' conditions for the age of equipment and indirectly for capital quality. To capture other motivators of better environmental management that do not fit within these categories, also included in regressions are Likert-scale rankings focusing on manager perceptions of the importance of reducing the cost of energy and material inputs and public subsidies, such as loans, grants and tax exemptions, as motivators for improved environmental performance.

RESULTS

Tables 8-10 present our econometric results from our model of EMS adoption. All dependent variables are binomial and were therefore estimated using logit. All models included the same explanatory variables, including 24 industry dummies. In the interest of brevity and because we do not focus on industry-specific differences in behaviour, industry effects are suppressed in the tables. The full set of parameter results is, however, available from the authors.

We see in Table 8 that the signs of statistically significant variables are in general as expected, with four variables estimated to be positively and significantly correlated with both the existence of audit, waste minimisation and pollution prevention (AWM&PP) programmes and environmental departments. Larger firms (as measured by total employment in 1997) are more likely to have both programmes, as are those that have formal permits and self-report emissions. Firms subject to more frequent air pollution monitoring by regulators were more likely to have AWM&PP programmes. Marginal effects of formal permits and self-reported emissions are very large, with firms experiencing these policies having 9 %-18 % higher probabilities of adoption. These effects are 15%-30% of means. Better environmental management may lead regulators to allow a greater degree of self-reporting, but it is also true that with limited regulatory monitoring capability, self-reporting is the preferred method in developed as well as CEE countries. We do not, however, know which way the causality runs.

Public information also appears to be empirically important. If the public is informed about firms' pollution emissions, the probability of having AWM&PP programmes is estimated to increase by 13%, which is 21% of the mean. Public information is also estimated to increase by 11% the probability firms have environmental departments, which is 18% of the mean. This result is supported by the Likert-scale variable focusing on the importance of public pressure, which is positively correlated with the existence of an environmental department.

Foreign market pressures are also estimated to be positively correlated with adoption of AWM&PP programmes and establishment of environmental departments. Marginal effects are 4%-7% of means, suggesting that international demand effects are important factors.

In the environmental department equation, we find the ratio of employees in 1997-1990 negatively correlated with the existence of an environmental department. This indicates that firms that shed employees over time were more likely to have such institutions, which suggests that efficiency may be an important driver of this aspect of EMS. Compared with means, firms that reduced their employment by 1.0 % were estimated to have a 10% higher probability of having an environmental department. Firms located in all countries were estimated to be less likely to have AWM&PP programmes than Poland, but Bulgarian and Romanian firms were more likely than Poland to have environmental departments.

The use of environmental planning, on-site wastewater treatment and ISO 14000 series certification are now considered, with results presented in Table 9. In Table 9, we see some important commonalities with results presented in Table 8 for other EMS adoption decisions. For example, scale is also a factor in adoption of the three EMS measures reported in Table 9 and firms that self-report emissions are again more likely to adopt all measures. Marginal effects of self-reporting are particularly large at 30%-45% of mean values. Public information about firm emissions is estimated to be an important driver of environmental planning and ISO 14001 certification, with marginal effects 25%-30% of means.

Perhaps, the most important difference with our previous results is that the Likert-scale variable focusing on the need to reduce energy and materials is positively and significantly correlated with ISO 14001 certification and onsite wastewater treatment, whereas in Table 8 it was insignificant. Marginal effects associated with increases of one Likert category are about 7% of means, which implies that firms in part adopt these EMSs to increase their profits. Another difference is that, consistent with Khanna and Anton (2002), expectation of future regulation is estimated to be a driver of environmental plan adoption.

Foreign private investment is estimated to be associated with increased adoption of environmental plans and on-site wastewater treatment, with a 10% increase in ownership share increasing the probability of adoption by approximately 2% (4%-5% of means). It seems likely that it is the foreign aspect rather than privatisation driving this result, however, because an increase in government ownership share is also positively correlated with the existence of environmental plans. Firms that perceived pressure from foreign markets to upgrade EMSs were more likely to seek ISO 14001 certifications. This effect is consistent with our hypothesis and results presented in Table 8. Polish firms are more likely than all other countries' firms to have environmental plans in place, but are less likely than Romanian firms to be seeking ISO 14001 certification.

In Table 10, which presents the determinants of internal air and water pollution monitoring, scale is again important, with larger firms more likely to monitor air and water pollution. Self-reporting is again also seen to be positively correlated with better management. We, of course, cannot be sure of the direction of causality, but firms that report their own emissions to government regulators are 12%-20% more likely to monitor air and water emissions than those that only report when checked by authorities. This represents 16%-34% increases above mean probabilities. Public information about pollution emissions also has major effects. At the 1% significance level, public information is estimated to increase the probability of internal monitoring by 10%-16%, which is 15%-28% of mean values.

Inspections by regulators are estimated to be important drivers of internal monitoring. Increasing inspections by one time per year is estimated to increase the probability of internal firm monitoring by 2%-3%. Firms for which expected future environmental regulations were important were more likely to have internal water pollution monitoring. The need to reduce energy and material use, however, appears to spur air pollution monitoring. This result suggests that the need to control energy costs is linked with air pollution management. Marginal effects in both cases were roughly 4%-5% of means. Also, positively correlated with air pollution monitoring was having formal permits for facilities.

The ratio of 1997-1990 employment is negatively associated with internal water pollution monitoring, suggesting again that efficiency is correlated with better EMS. This effect is estimated to be large, with a 1% decline in employment correlated with an increase in the probability of internal monitoring of 7%. Government ownership is negatively associated with internal water pollution monitoring, but marginal effects are small. Polish firms are again systematically more likely to adopt EMS components. Except for three country dummies that had coefficient estimates not significantly different from zero, Polish firms are more likely to engage in air and water pollution monitoring.

CONCLUSIONS

This paper tested some hypotheses from the literature related to adoption of key EMS elements. The particular contribution is that these issues are examined within the context of the economic and political transitions in CEE countries. The literature suggests that privatisation, FDI, exports to western countries, better public administration, including environmental regulatory monitoring and enforcement, and expanded civil society may be important drivers of better environmental management.

Our findings generally support the literature, although we do not find that privatisation per se is associated with EMS adoption. Better environmental regulatory systems, including self-reporting of emissions by firms and in some models formal permits and pollution monitoring by environmental regulators, are important for adoption of EMSs. Expectation of future regulations is estimated to be a significant driver of AWM&PP programmes, environmental planning and water pollution monitoring. Self-reporting has large marginal effects in a variety of cases, which suggests that what some might view as an administrative detail could have major environmental implications. Simply putting the burden for calculating, recording and reporting pollution on firms appears to spur more advanced environmental measures, although as we have emphasised, the actual mechanisms involved or even the direction of causality is not known for sure. The importance of self-reporting should be an area for future economic research.

Making information about pollution discharges available to the public appears to create a wide variety of empirically important and statistically significant incentives for adopting virtually all environmental management measures. We expect that firms are responding to public pressure generated by the availability of information, suggesting that improved civil societies are an important factor in EMS adoption. Of course, the effectiveness of the environmental management measures adopted is unknown and it is possible they are in reality 'greenwash'. Given the short time in which public information and civic participation have developed, though, it is notable that they affect firm behaviour at all.

We also find evidence that FDI is associated with the use of select environmental management methods. Of special interest is the strong relationship with environmental planning, suggesting that Western strategic planning methods could potentially be paying environmental dividends in CEE countries. Consistent with the results of Andonova (2003), we find that firms which perceived strong pressures from foreign markets to comply with environmental norms were indeed more likely to adopt a number of EMSs. Firms subject to such pressures were more likely to have environmental departments, be seeking ISO 14001 certification and have AWM&PP programmes in place. These results suggest that export-driven firms are more likely to adopt EMS measures. This finding is consistent with those of Bellesi et al. (2005).

That air pollution monitoring, ISO 14001 certification and wastewater treatment are positively associated with the need to reduce energy use and material waste suggests that cost pressures associated with the economic transition itself stimulated closer attention to production processes. That efficiency and EMS adoption are related is also supported by the result that while firms with more employees (ie larger firms) were more likely to have instituted all environmental management measures, reductions in employment during the 1990s (ie increases in efficiency) were associated with a number of EMS components. In this regard, economic efficiency and EMS adoption appear to have some complementarities.

These results suggest that a variety of factors are driving the adoption of respected environmental management techniques. An important methodological issue is that we treat the various measures of environmental behaviour here as independent of each other. In reality, they are likely to be substitutes or complements, which would make the analysis substantially more complicated. This is left to future research as is examining the relationship between transition factors and emissions of key industrial pollutants.

Acknowledgements

We thank Dietrich Earnhart, Irene Henriques and Perry Sadorsky for helpful comments on drafts of this paper and Theo Panayotou for his leadership while Bluffstone was at the Harvard Institute for International Development. We also thank the Swedish international development cooperation agency, Sida, for financing the analysis that led to this paper and USAID for supporting the data collection. Finally, we acknowledge the contributions of the researchers at Bulgarian Industrial Association (Bulgaria), TARKI (Hungary), Environmental Policy Center (Lithuania), Institute of Economics, Polish Academy of Sciences (Poland), CESEP (Romania) and Incoma (Slovakia), which collected the data used in this paper.

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RANDALL BLUFFSTONE (1) & THOMAS STERNER (2)

(1) Department of Economics, Portland State University, PO Box 751, Portland, OR 97207-0751, USA. E-malt: bluffsto@pdx.edu

(2) Department of: Economics, University of Gothenburg, PO Box 640, Gothenburg 40530, Sweden. E-mail: thomas.sterner@economics.gu.se

Table 1: Sample size at NASIC three-digit level

Industry Number of firms

Animal raising 56
Other agriculture 81
Oil and gas extraction 22
Mining 77
Electric power generation 84
Other utilities 1
Food manufacturing 264
Beverage and tobacco production 85
Textile mills 83
Textile product manufacturing 34
Apparel manufacturing 199
Leather goods production 102
Wood products 49
Paper manufacturing 48
Printing 17
Petroleum products 24
Chemical manufacturing 211
Plastics and rubber manufacturing 73
Nonmetallic mineral products 156
Primary metal manufacturing 80
Metal fabrication 113
Machinery manufacturing 192
Computer and electronic manufacturing 40
Electrical equipment and appliance production 85
Transportation equipment manufacturing 106
Furniture and related products 40
Miscellaneous manufacturing 62
Industry not reported 9
Total 2,393

Table 2: Summary of EMS adoption by sample firms

Country Percent of firms adopting

 AWM&PPP Environmental Environmental
 (%) departments plans (%)

Bulgaria 51.2 61.3 39.1
Hungary 42.7 16.9 36.2
Lithuania 65.0 17.4 31.9
Poland 63.2 30.0 50.0
Romania 75.4 82 48.5
Slovakia 52.8 30.2 38.5
Full sample 61.1 45.3 42.5

Country Percent of firms adopting

 ISO 14001 On-site waste-
 certification water treatment

Bulgaria 18.1 52.0
Hungary 16.0 19.1
Lithuania 18.0 34.5
Poland 15.2 29.4
Romania 49.5 30.1
Slovakia 35.2 32.0
Full sample 26.0 33

Table 3: Frequency of pollution monitoring by firms in 1998

Frequency Water pollution (n=2328)

 Number of firms % of firms

No monitoring 821 35.7
Annually 250 10.7
Quarterly 212 9.1
Monthly 420 18.0
Weekly 259 11.1
Daily 203 8.7
More frequently than daily 163 7.0

Frequency Air pollution (n=2312)

 Number of firms % of firms

No monitoring 1010 43.7
Annually 742 32.1
Quarterly 184 8.0
Monthly 189 8.2
Weekly 51 2.2
Daily 60 2.6
More frequently than daily 76 3.3

Table 4: Descriptive statistics for independent
variables and reason for including

Independent variable Mean Std. Dev.

Average age of most 21.8 15.3
capital utilised by firm

Total firm employment in 1997 662.8 1,324

Ratio 1997 to 1990 firm employment 1.17 2.7

Private foreign ownership share (a) 9.4 25.6

Government ownership share (a) 32.2 39.5

% Main product that was exported 28.0 35.2
in 1997

% Total exports that went to EU 34.3 42.7
in 1997

Average number of wastewater 3.7 3.82
inspections per year by regulators

Average number of air pollution 3.65 4.02
inspections per year by regulators

Firm self-reports pollution 0.58 0.49
emissions (dummy)

Inspector visits are announced 0.19 0.39
(dummy)

Firm has pollution permits for 0.69 0.46
some or all facilities

Public is informed about 0.24 0.43
pollution emissions (dummy)

Importance for motivating improved
environmental management in 1997
(Likert scale O=no effect; 5=max
effect)

Importance of foreign market 2.3 2.0
pressures

Importance of pressure from 2.3 1.9
suppliers and investors

Importance of expected future 2.7 1.9
regulations

Importance of reducing energy/ 2.6 1.9
material use

Importance of pressure from 1.7 1.6
civic groups

Importance of public incentives 1.9 1.9
like loans, grants, etc

Independent variable Expected relationship with EMS
 and reason for including

Average age of most (+/-) Proxy for capital vintage--
capital utilised by firm conditioning variable

Total firm employment in 1997 (+) Proxy for firm size--
 conditioning variable

Ratio 1997 to 1990 firm employment (+) Proxy for output change 1990-
 1997. Test hypothesis that output
 declines discourage environmental
 management

Private foreign ownership share (a) (+) Test hypothesis that FDI
 encourages adoption of EMS

Government ownership share (a) (-) Test hypothesis that
 government ownership discourages
 EMS adoption

% Main product that was exported (+) Test hypothesis that higher
in 1997 export intensities encourage
 adoption of EMS

% Total exports that went to EU (+) Test hypothesis that greater
in 1997 Western European focus encourages
 environmental management

Average number of wastewater (+) Test hypothesis that more
inspections per year by regulators frequent monitoring by regulators
 encourages EMS adoption

Average number of air pollution (+) Test hypothesis that more
inspections per year by regulators frequent monitoring by
 regulators encourages
 environmental management

Firm self-reports pollution (+) Test whether adopting
emissions (dummy) pollution reporting system used
 in the West encourages EMS

Inspector visits are announced (-) Test hypothesis that more
(dummy) stringent enforcement encourages
 adoption of EMS

Firm has pollution permits for (+) Test whether existence of
some or all facilities permits affects EMS adoption

Public is informed about (+) Test hypothesis that public
pollution emissions (dummy) information and pressure
 encourages adoption of EMS

Importance for motivating improved
environmental management in 1997
(Likert scale O=no effect; 5=max
effect)

Importance of foreign market (+) Test hypothesis that more
pressures export focus encourages adoption
 of EMS

Importance of pressure from (+) Test whether non-customer
suppliers and investors pressures are important drivers
 of EMS use

Importance of expected future (+) Test whether firms are trying
regulations to be pro-active when they adopt
 EMSs

Importance of reducing energy/ (+) Test whether cost pressures
material use spur EMSs.

Importance of pressure from (+) Test hypothesis that
civic groups public information and pressure
 encourages adoption of EMSs

Importance of public incentives (+) Test whether public subsidies
like loans, grants, etc encourage EMS use

(a) Default ownership form is private domestic.

Table 5: Average firm employment in 1990 and 1997

Country 1990 1997

Bulgaria 1,120 761
Hungary 327 267
Lithuania 703 292
Poland 869 556
Romania 1,830 1,325
Slovakia 1674 612
Full sample 1,070 700

Table 6: Average % of firms' main products
exported and % of exports destined for the EU

Country Average % of main % of exports
 product exported destined for the EU

 1990 1997 1990 1997

Bulgaria 18 33 16 30
Hungary 63 64 41 46
Lithuania 15 25 19 24
Poland 16 23 34 38
Romania 7 11 8 10
Slovakia 9 32 26 31
Overall sample 19 28 21 28

Table 7: Monitoring of emissions by various regulatory authorities

Country Water pollution

 Average frequency % Firms that are
 of monitoring for not monitored by
 firms that are regulators (%)
 monitored
 (months)

Bulgaria 7.49 25.3
Hungary 3.04 No data
Lithuania 3.14 1.1
Poland 10.63 0.0
Romania 2.69 14.4
Slovakia 3.79 54.8
Full sample 5.4 21.1

Country Air pollution

 Average frequency of % Firms that are
 monitoring for firms NOT monitored by
 that are monitored regulators (%)
 (months)

Bulgaria 9.09 43.9
Hungary 1.59 No data
Lithuania 7.97 2.1
Poland 6.27 0.0
Romania 2.44 21.2
Slovakia 4.39 43.9
Full sample 5.16 25.9

Table 8: Logit models of existence of
environmental programmes and facilities

 Internal audit,
 pollution prevention/
 waste minimisation
 programmes

 Coefficient Marginal
 effect

Constant -1.715 *** -0.3753
Bulgaria dummy -1.083 *** -0.2460
Hungary dummy -0.7695 * -0.1806
Lithuania dummy -0.5213 -0.1210
Romania dummy -0.6685 * -0.1504
Slovakia dummy -1.3822 -0.3322
Private foreign ownership share 0.0012 0.0003
Government ownership share 0.0009 0.0002
Total employment in 1997 0.0004 *** 0.0001
Ratio of employees from 1997 to 1990 0.0185 0.0041
Year in which most capital was built 0.0028 0.0006
% Main product that was exported in 1997 -0.0042 -0.0009
% Total exports that went to EU in 1997 -0.0034 -0.0008
Average number of wastewater inspections per 0.0323 0.0071
year by regulators
Average number of air quality inspections per 0.0382 * 0.0084
year by regulators
Inspector visits are announced 0.2385 0.0508
Firm self-reports pollution emissions 0.8158 *** 0.1829
Firm has permits for some or all facilities 0.4934 ** 0.1131
Public is informed about firm's pollution 0.6251 *** 0.1297
Importance of foreign market pressures 0.2046 *** 0.0448
Importance of pressure from suppliers and -0.0057 -0.0013
investors
Importance of expected future regulations 0.0974 * 0.0213
Importance of reducing energy and material -0.0802 -0.0175
use
Importance of pressure from civic groups 0.0084 0.0019
Importance of public incentives like loans, -0.0065 -0.0014
grants, etc
 Number of observations 1055
 % Correct predictions 74.88%
 Pseudo-[R.sup.2] 0.22
 Mean of dependent variable 0.63

 Environmental department

 Coefficient Marginal
 effect

Constant -2.771 *** -0.6139
Bulgaria dummy 1.6070 *** 0.3128
Hungary dummy 0.0166 0.0037
Lithuania dummy -0.2351 -0.0536
Romania dummy 2.1243 *** 0.3966
Slovakia dummy 0.6080 0.1190
Private foreign ownership share 0.0009 0.0002
Government ownership share 0.0027 0.0006
Total employment in 1997 0.0011 *** 0.0002
Ratio of employees from 1997 to 1990 -0.2838 ** -0.0629
Year in which most capital was built 0.0016 0.0004
% Main product that was exported in 1997 0.0020 0.0004
% Total exports that went to EU in 1997 0.0012 0.0003
Average number of wastewater inspections per 0.0333 0.0074
year by regulators
Average number of air quality inspections per 0.0038 0.0008
year by regulators
Inspector visits are announced 0.1781 0.0387
Firm self-reports pollution emissions 0.4096 ** 0.0921
Firm has permits for some or all facilities 0.4163 ** 0.0959
Public is informed about firm's pollution 0.4971 *** 0.1059
Importance of foreign market pressures 0.1165 * 0.0258
Importance of pressure from suppliers and 0.0095 0.0021
investors
Importance of expected future regulations 0.0200 0.0044
Importance of reducing energy and material 0.0241 0.0053
use
Importance of pressure from civic groups 0.1203 * 0.0266
Importance of public incentives like loans, 0.0144 0.0032
grants, etc
 Number of observations 1065
 % Correct predictions 78.59%
 Pseudo-[R.sup.2] 0.31
 Mean of dependent variable 0.59

** and *** indicate significance at least at the 10%,
5% and 1% levels. See Table 4 for variable definitions.

Industry dummy results are suppressed, but available
from the authors.

Table 9: Logit models of existence of
various environmental management tools

 Environmental plan

 Coefficient Marginal
 effect

Constant -1.495 *** -0.3712
Bulgaria dummy -1.373 *** -0.3188
Hungary dummy -0.8353 ** -0.1953
Lithuania dummy -1.391 *** -0.2989
Romania dummy -1.136 *** -0.2689
Slovakia dummy -0.6508 -0.1521
Private foreign ownership share 0.0070 ** 0.0018
Government ownership share 0.0037 * 0.0009
Total employment in 1997 0.0003 *** 0.0001
Ratio of employees from 1997 to 1990 -0.0269 -0.0067
Year in which most capital was built 0.0102 * 0.0025
% Main product that was exported in 1997 0.0070 ** 0.0017
% Total exports that went to EU in 1997 -0.0006 -0.0002
Average number of wastewater inspections
 per year by regulators 0.0226 0.0056
Average number of air quality inspections
 per year by regulators 0.0322 0.0080
Inspector visits are announced -0.1354 -0.0335
Firm self-reports pollution emissions 0.5904 *** 0.1444
Firm has permits for some or all facilities 0.1792 0.0442
Public is informed about firm's pollution 0.466 *** 0.1158
Importance of foreign market pressures -0.0783 -0.0194
Importance of pressure from suppliers and
 investors -0.0053 -0.0013
Importance of expected future regulations 0.1551 *** 0.0385
Importance of reducing energy and material
 use 0.0689 0.0171
Importance of pressure from civic groups -0.0370 -0.0092
Importance of public incentives like loans,
 grants, etc 0.0605 0.0150
 Number of observations 1059
 % Correct predictions 71.34%
 Pseudo-[R.sup.2] 0.191
 Mean of dependent variable 0.461

 ISO 14001 certification

 Coefficient Marginal
 effect

Constant -3.635 *** -0.6411
Bulgaria dummy 0.1195 0.0213
Hungary dummy 0.2851 0.0530
Lithuania dummy 0.0299 0.0053
Romania dummy 1.1323 *** 0.2168
Slovakia dummy 1.3857 0.3132
Private foreign ownership share 0.0027 0.0005
Government ownership share 0.0006 0.0001
Total employment in 1997 0.0002 *** 0.0000
Ratio of employees from 1997 to 1990 -0.0767 -0.0135
Year in which most capital was built 0.0039 0.0007
% Main product that was exported in 1997 -0.0037 -0.0007
% Total exports that went to EU in 1997 -0.0013 -0.0002
Average number of wastewater inspections
 per year by regulators 0.0355 0.0063
Average number of air quality inspections
 per year by regulators 0.0037 0.0007
Inspector visits are announced 0.1041 0.0187
Firm self-reports pollution emissions 0.6300 *** 0.1064
Firm has permits for some or all facilities 0.2607 0.0439
Public is informed about firm's pollution 0.483 *** 0.0895
Importance of foreign market pressures 0.1006 * 0.0177
Importance of pressure from suppliers and
 investors 0.0250 0.0044
Importance of expected future regulations 0.0302 0.0053
Importance of reducing energy and material
 use 0.1202 ** 0.0212
Importance of pressure from civic groups 0.0849 0.0150
Importance of public incentives like loans,
 grants, etc -0.1205 ** -0.0213
 Number of observations 1049
 % Correct predictions 76.36%
 Pseudo-[R.sup.2] 0.192
 Mean of dependent variable 0.286

 Wastewater treatment
 on-site

 Coefficient Marginal
 effect

Constant -2.053 *** -0.4725
Bulgaria dummy 0.6650 * 0.1561
Hungary dummy -0.1505 -0.0341
Lithuania dummy -0.5253 -0.1127
Romania dummy -0.5892 * -0.1307
Slovakia dummy 1.4638 0.3489
Private foreign ownership share 0.0088 ** 0.0020
Government ownership share 0.0035 0.0008
Total employment in 1997 0.0004 *** 0.0001
Ratio of employees from 1997 to 1990 -0.240 ** -0.0554
Year in which most capital was built 0.0047 0.0011
% Main product that was exported in 1997 0.0010 0.0002
% Total exports that went to EU in 1997 -0.0006 -0.0001
Average number of wastewater inspections
 per year by regulators 0.086 *** 0.0198
Average number of air quality inspections
 per year by regulators -0.0184 -0.0042
Inspector visits are announced 0.0470 0.0109
Firm self-reports pollution emissions 0.7244 *** 0.1606
Firm has permits for some or all facilities 0.3376 0.0750
Public is informed about firm's pollution 0.1265 0.0293
Importance of foreign market pressures -0.0075 -0.0017
Importance of pressure from suppliers and
 investors -0.1409 ** -0.0324
Importance of expected future regulations 0.0689 0.0158
Importance of reducing energy and material
 use 0.1247 ** 0.0287
Importance of pressure from civic groups -0.1281** -0.0295
Importance of public incentives like loans,
 grants, etc 0.0652 0.0150
 Number of observations 1023
 % Correct predictions 73.51%
 Pseudo-[R.sup.2] 0.190
 Mean of dependent variable 0.387

*, ** and *** indicate significance at least at the 10%, 5% and
1% levels. See Table 4 for variable definitions. Industry dummy
results are suppressed, but available from the authors.

Table 10: Logit models of existence of internal
air and water pollution monitoring

 Water pollution

 Coefficient Marginal
 effect

Constant -0.7289 -0.0819
Bulgaria dummy -2.462 *** -0.3734
Hungary dummy -4.225 *** -0.7732
Lithuania dummy -0.6133 0.0821
Romania dummy -0.6980 -0.0855
Slovakia dummy -3.6649 ** -0.7233
Private foreign ownership share 0.0046 0.0005
Government ownership share -0.0063 ** -0.0007
Total employment in 1997 0.0014 *** 0.0002
Ratio of employees from 1997 to 1990 -0.469 *** -0.0527
Year in which most capital was built 0.0015 0.0002
% Main product that was exported in 1997 0.0028 0.0003
% Total exports that went to EU in 1997 -0.0030 -0.0003
Average number of wastewater inspections per 0.1929 *** 0.0217
year by regulators
Average number of air quality inspections per -0.0158 -0.0018
year by regulators
Inspector visits are announced 0.1449 0.0158
Firm self-reports pollution emissions 0.9377 *** 0.1161
Firm has permits for some or all facilities 0.4120 0.0511
Public is informed about firm's pollution 1.0598 *** 0.1029
Importance of foreign market pressures -0.0377 -0.0042
Importance of pressure from suppliers and -0.0176 -0.0020
investors
Importance of expected future regulations 0.2887 *** 0.0324
Importance of reducing energy and material -0.0583 -0.0066
use
Importance of pressure from civic groups -0.1670 ** -0.0188
Importance of public incentives like loans, 0.0734 0.0083
grants, etc
 Number of observations 1065
 % Correct predictions 86.10%
 Pseudo-[R.sup.2] 0.45
 Mean of dependent variable 0.70

 Air pollution

 Coefficient Marginal
 effect

Constant -1.0853 * -0.2559
Bulgaria dummy -2.668 *** -0.5828
Hungary dummy -1.834 *** -0.4261
Lithuania dummy -1.0229 ** -0.2499
Romania dummy -1.0197 ** -0.2435
Slovakia dummy -0.6361 -0.1566
Private foreign ownership share 0.0003 0.0001
Government ownership share -0.0005 -0.0001
Total employment in 1997 0.0002 ** 0.0001
Ratio of employees from 1997 to 1990 -0.0524 -0.0124
Year in which most capital was built 0.0026 0.0006
% Main product that was exported in 1997 0.0022 0.0005
% Total exports that went to EU in 1997 -0.0051* -0.0012
Average number of wastewater inspections per 0.0114 0.0027
year by regulators
Average number of air quality inspections per 0.1434 *** 0.0338
year by regulators
Inspector visits are announced 0.0396 0.0093
Firm self-reports pollution emissions 0.8215 *** 0.1957
Firm has permits for some or all facilities 0.5162 ** 0.1252
Public is informed about firm's pollution 0.7255 *** 0.1630
Importance of foreign market pressures 0.0416 0.0098
Importance of pressure from suppliers and -0.0663 -0.0156
investors
Importance of expected future regulations 0.0230 0.0054
Importance of reducing energy and material 0.1132 ** 0.0267
use
Importance of pressure from civic groups -0.0628 -0.0148
Importance of public incentives like loans, 0.0463 0.0109
grants, etc
 Number of observations 1065
 % Correct predictions 78.22%
 Pseudo-[R.sup.2] 0.310
 Mean of dependent variable 0.581

*, ** and *** indicate significance at least at the 10%, 5%
and 1% levels. See table 13 for full variable definitions.

Industry dummy results are suppressed, but available from
the authors.