By Kris White
This blog post is part of a series of essays written by BAIB students on the contextual factors of Brexit on multinational enterprises for the module Multinationals in the Domestic and Global Context.
Short Bio of the author: Kris White is a final year BA(Hons) International Business student with expertise in Corporate Social Responsibility and the formulation of sustainable business strategies.
Environmental policies represent a “set of principles and intentions used to guide decision making about human management of environmental capital and environmental services” (Roberts, 2011, p. 2). Modern organisations are heavily scrutinised for their behaviours, and are being encouraged to act more responsibly towards all stakeholders affected by their operations. In multinational enterprises (MNEs), sustainable practices are strongly influenced by the levels of each nation’s national environmental policy within which they operate, where there is an obligation to meet stipulated limits of environmental output. Following Brexit and the subsequent departure from the European Union (EU), the extent to which regulations will change is not yet clear, however UK-based MNEs are likely to be impacted. The car industry is an area of particular interest, especially following recent emissions-based scandals that have thrown current levels of enforcement into question. This essay will critically analyse these issues within the case of car manufacturer Vauxhall, who are already experiencing a period of transition having been acquired by Peugeot parent company PSA in 2017, to determine appropriate environmental strategies for home-based MNEs during this time of uncertainty. It will achieve this by doing the following: developing an understanding of environmental risks raised following Brexit; exploring sustainability-focused strategies that Vauxhall could employ in order to realise a competitive advantage; determining ways through which the UK government could encourage mutual gains with MNEs regarding environmental protection and national competitiveness; and uncover issues Brexit presents that may discourage MNEs from working towards these environmental goals.
The Post-Brexit Environmental Landscape
Upon Britain’s withdrawal from the EU, a subject of recurrent discussion has been the extent to which the focus on the environment from both the government, and MNEs based in the UK, may deteriorate. Sceptics have anticipated limited levels of environmental legislation to be introduced in place of current EU regulations, raising a future of ‘uncertainty’ for professionals dedicated to the protection of the environment (Daily CSR, 2016). Since the UK owes up to 90% of its current environmental laws to the EU (Corporate Citizenship, 2016), it could be assumed that although these may not disappear entirely, a more watered-down level of regulation may emerge in the long-term. This being said, there is an alternative possibility that these issues may instead come to the fore (IHRB, 2016) since the government will have greater control over its sustainability objectives and how to finance these, meaning more capital could actually be made available for environmentally-focused expenditure (Remsol, 2016). Irrespective of the long-term environmental agenda however, this raises a large degree of uncertainty for MNEs operating within the UK, and presents a multitude of issues regarding their environmental and stakeholder engagement behaviours.
In the case of the UK car manufacturing industry, the ambiguity of the current situation may draw firms such as Vauxhall to minimise their strategies for sustainability, risking a backward step in the arena of corporate responsibility. Crucially, this risk could be exacerbated upon any introduction of trade tariffs, as Vauxhall currently export 80% of their 120,000 cars a year to countries within the EU (Campbell, 2016), suggesting a lesser degree of annual revenues could be allocated to their Corporate Social Responsibility (CSR) budget. The organisation does currently possess a long-term environmental agenda, which they claim demonstrates a commitment resulting from numerous core ‘principles’ (Vauxhall, 2017), however it cannot be guaranteed that this will remain as strong a priority throughout such a testing period for both the company, and the industry at large. This would by no means imply that Vauxhall simply do not care about their sustainable practices, just that it would be too expensive to continue in an already competitive and volatile market.
Conversely, it could be argued that Vauxhall have only engaged in environmental welfare to brush-over wrongdoings in other areas. This was demonstrated in the costly revelation that Vauxhall had cheated laboratory tests by fitting cars with software that significantly reduced emissions readings (Chapman, 2016), presenting a stark contrast to the environmental consciousness they claim in their sustainability reports. Such a tainting discovery, in addition to a widespread recall in vehicles around the same period due to instances of cars ‘catching fire’, led to a sharp drop in UK sales not long before Brexit (Campbell, 2016). While this was largely damaging to Vauxhall’s strategic position, and the level of emissions exceeded EU limits, authors have argued that firms should not need to interfere with further societal issues beyond those that are enforced by regulatory bodies. Friedman (1962) advocated the view that the sole corporate responsibility is to increase levels of profit, in order to provide adequate returns to shareholders, and Levitt (1958) similarly proposes that governments should “take care of general welfare so that business can take care of the more material aspects of welfare” (p. 49). Levels of environmental accountability have increased exponentially since these theories were published and therefore their applicability may be limited, however it can be determined that a means of addressing the mutual needs of shareholders and stakeholders must be attained in order for MNEs including Vauxhall to prosper in the long-term, whilst managing the discussed risks Brexit may pose.
Justifying the Sustainability Agenda
A potential means for Vauxhall to thrive despite the perceived uncertainties following Brexit could be to implement an all-encompassing sustainability strategy, which aids their corporate agenda whilst improving their external societal impact. To achieve a capability in environmental leadership, this may require the incorporation of a ‘best practice’ approach, whereby non-location specific firm-specific advantages (FSA) are established irrespective of the country they are in. Whilst this would constitute a dramatic undertaking for Vauxhall, the benefits incurred as a result can be understood by applying Lampikoski et al’s (2014) ‘Green Innovation Games’ theory. The current environmental strategy is representative of the ‘Rational Game’, where engagement is predominantly a reactant to market competition, and incentives are limited to operational cost reductions. This differs significantly from the evolutionary nature of the ‘Clarity Game’, where ‘players’ seek to legitimise new value-creation logic, and grasp the opportunity for first-mover advantages by revolutionising what it means to be sustainable within their industry. The success of this form of strategy may depend on the quality of change leadership throughout its adoption, however it represents a means by which Vauxhall could use sustainability to their advantage. More importantly, it poses an opportunity to avoid tailoring environmental commitments to each location they operate in, due to widespread superior standards, thus limiting the issues caused by changes in regulation following Brexit.
Furthermore, the acquirement of non-location specific ‘best practice’ capabilities provides the incentive of improved organisational performance. For example, establishing common behaviours throughout the organisation could theoretically generate economies of scope, where inimitable template knowledge is utilised across all products and processes (Grant, 1997). Additionally, research has indicated that CSR engagement can lead to improvements in corporate reputation, subsequently enhancing financial performance through improved sales (Waddock and Graves, 1997). However, contrary to these arguments for non-location bound FSAs, others have stressed a requirement to tailor environmental strategies to specific locations, purely due to the extent national pressures and expectations continue to exist across borders (Rugman and Verbeke, 2003). Moreover, there is a risk that Vauxhall could opt out of such an approach by instead leaving the UK to establish operations in ‘pollution havens’ to avoid any repercussions for their questionable environmental behaviour (Levinson and Taylor, 2008). While this might imply a tempting post-Brexit escape route for a firm uncertain over future UK environmental regulations, the theory of pollution havens lacks empirical support (Eskeland and Harrison, 2003), and withdrawing its operations from the UK at the expense of thousands of jobs may only add to its already damaged corporate reputation. In summary, these arguments alone may fail to justify the implementation of such a drastic environmental strategy, and instead require additional incentives to adjust their current behaviours.
Facilitating Sustainable Strategies
Reaching desired levels of environmental consciousness by MNEs could require an implementation of more stringent national environmental policies. A currently held expectation has been that in order to maintain free trade with EU nations, which predominantly impacts the car industry in the acquiring of vehicle components and exportation of products, the UK will need to adopt environmental regulations at least equivalent to current EU policies (House of Lords, 2016). This is of utmost concern for UK-based car manufacturers, since increases to transaction costs could severely hamper their competitiveness in international markets. Research by the Organisation for Economic Co-operation and Development has indicated that there is no evidence to suggest that countries that introduce tough environmental policies see exports suffer as a result (OECD, 2016) and governments should dispel these assumptions in order to focus on the edge they can acquire from innovation (Elliot, 2016). This evidence would suggest that stringent policies could actually assist home-based MNEs, and Porter and van der Linde (1995) help to elucidate this perspective, by proposing that increased national regulations forces firms into developing ‘green’ products and capabilities, opening up new market segments and allowing them to command price premiums above what was previously available.
Consequently, it can be deduced that Vauxhall would be more inclined to develop the environmentally founded strategic capabilities discussed previously, and re-shape their business model towards achieving a sustainable competitive advantage (SCA) over market rivals. By applying Rugman and Verbeke’s (1998) framework (Figure 1), this represents an alignment of both quadrants 1 and 3, since strict policies would guarantee Vauxhall’s environmental compliance whilst encouraging the achievement of market-based objectives. In this way, the framework lacks a consideration of promoting mutual interests between the profit-seeking strategy of Vauxhall and the wider interests of society. However, it does help to indicate that current national and EU policies lack the required level of regulation, as the failure to investigate the emissions scandals sooner could be viewed as a means of protecting the nation’s commercial interests ahead of ensuring public health (Chapman, 2016).
Figure 1: Rugman and Verbeke (1998)
Furthermore, the premise of encouraging systematic innovation on the part of home-based MNEs using stricter policies may enhance national competitiveness through an anticipation of future host-country regulations. For example, if Vauxhall were to place a greater emphasis on accelerating the development of their ecoFLEX range of vehicles (Vauxhall, 2017), and re-shape their corporate structure around furthering the advancement of ‘green’ technology, the organisation could retain a sustainable competitive advantage when competitors are forced to meet these levels of environmental performance further down the line, as the company’s level of innovation will already be one step ahead. Research has suggested that home-country government regulations are most influential in the design of MNE environmental strategies (Delmas and Toffel, 2004), suggesting the UK government could encourage Vauxhall to improve their overarching sustainability strategy, however Buyesse and Verbeke (2003) dispute such a claim, arguing that responsiveness to environmental regulation is insufficient to push firms to move beyond pollution prevention. Nevertheless, this analysis would indicate that in order to avoid post-Brexit dangers of trade tariffs, whilst enhancing national competitiveness and maintaining a consideration for the preservation of the environment, a solution could be to impose stricter environmental policies upon UK companies.
Difficulties in Locating the Middle Ground
Despite the perceived benefits of the strategies discussed throughout this analysis, there are several issues that could hamper the motivations for MNEs competing within the car industry to prioritise their sustainability efforts, irrespective of government regulations. Primarily, since the ultimate objective for managers will continue to be a maximisation of firm profitability, sustainability will naturally take a back seat against the immediate requirement to weather the upcoming economic impacts following the Brexit result. In a time where short-term survival will prove paramount, the long time period required for CSR initiatives to transfer into financial returns (Brammer and Millington, 2008) will make shareholders hesitant to engage in such a risky, future-oriented investment. Having been acquired by Peugeot parent company PSA in early 2017, this could yet prompt a radical adjustment to a strategy representative of the ‘Clarity Game’ discussed previously, however a larger focus on exporting to markets outside of Europe would appear more likely (BBC, 2017). Moreover, not all empirical research on the environmental performance-financial performance relationship has returned positive findings (Levy, 1995), meaning a greater role must be taken by the UK government to spur corporate efforts in the desired direction, and encourage innovative approaches to reducing adverse environmental impacts.
This essay has critically explored the impacts of Brexit on the environmental strategies for a UK-based MNE within the car industry, and analysed the possible responses that could be used to maintain competitiveness without compromising efforts to meet the needs of wider society. Findings have suggested that despite uncertainties in long-term national environmental regulations, Vauxhall could implement a significant re-shaping of their corporate structure in order to develop non-location specific ‘green’ advantages, which are immune to varying government requirements by subscribing to a higher level of eco-friendly practices. Since significant investments would be required to adhere to this strategy, and the possibility for the introduction of EU trade tariffs still remain, this may require an introduction of more stringent UK environmental policy to alleviate this risk and help to justify such a large undertaking. Finally, the substantial period of time sustainability projects require before providing a financial return would risk deterring the motivations of shareholders. In summary therefore, whilst issues of sustainability will inevitably affect MNEs post-Brexit, it appears unlikely that this will usher in the start of a widespread movement of green-centric, environmentally driven organisations.
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