Topic Area: Industrial Structure

Geographic Area: China
Focal Question: How does the ownership structure of Chinese firms affect their environmental performance?
Sources: 1. Wang, Hua and Yanhong Jin. “Industrial Ownership and Environmental Performance: Evidence from China.” World Bank Policy Research Working Paper 2936. December 2002.
Reviewer: Spencer C. Hutchins ’03

Review:

Over the past few decades, China has begun major reforms to their state-owned industries as they liberalize their economic system and allow for different forms of ownership. This study, currently a working paper for the World Bank, focuses on the various environmental track records of State-Owned Enterprises (SOE), Community Owned Enterprises (COE), Privately Owned Enterprises (POE), and Foreign Directly Invested companies (FDI). To do this, the authors focus on three Chinese regions, Danyang of the Jiangsu Province, Liupanshui of the Guizhou Province and the Northern Tianjian Municipality. Within these provinces, approximately 1000 firms were studied in the year of 2000 and detailed production information was gathered.

This study, and the succeeding analysis, focuses on the environmental effects of ownership structure. Prior to the empirical research, the authors discus previous work in the field, and then delve into theoretical incentives for pollution control. What makes this analysis both interesting and difficult is that there appears to be different incentives working at cross purposes to one another. SOEs are theoretically most likely to internalize nation wide externalities, COEs are likely to do the same, but only for community level externalities, and POEs and FDIs are unlikely to consider these costs at all. However, POEs and FDI are more likely to be efficiently run, which may result in superior technology or methods, decreasing pollution. An additional factor they examine is the relationship between a firm and the body responsible for its regulation. POEs and FDIs are unlikely to have significant bargaining position, whereas SOEs are likely to have intimate connections with a regulatory agency, since they are both state owned; COEs likely fall somewhere in-between.

To model a company’s pollution discharge decision, the authors assume that a company will attempt to minimize three potential costs: 1) total factor cost, including costs associated with pollution abatement. 2) total cost of penalties paid for regulatory penalties. And 3) total social cost of pollution. POEs and FDIs are likely to only consider costs 1 and 2, whereas to varying degrees, SOEs and COEs will consider all three. The theoretical analysis, using this framework, is inconclusive because regulatory, internalization, and efficiency dynamics work at cross purposes with each other. Ultimately, the authors conclude that only empirical work can ascertain the relative weight of these effects.

After a brief historical description of China’s environmental regulatory environment, Wang and Jin describe the methodology behind their survey. The three regions chosen (Northern Tianjin, Danyang, and Liupanshui), were done so because of social and economic differences, the wide variety of industry in those areas, and because the government was willing to cooperate with the study. Sources for the data included municipal environmental agencies, questionnaires to each plant’s employee responsible for environmental regulations, and a survey of plant managers.

There were numerous initial indications from the data. SOEs are generally much larger than other firms, and have much higher concentrations of air pollution. COEs, while fairly good on most pollutants, had high levels of total suspended solids (TSS) in their water pollution, but POEs had the highest combined total of all water pollutants. SOEs and joint venture FDIs (largely because of their SOE components) most often violated emissions standard and COEs did so the most rarely. Additionally, COEs were the only firms to avoid any community complaints and POEs were the more likely to be inspected by regulators.

To further analyze the survey data, the authors developed an econometric analysis of the pollution discharge intensity. Using techniques from previous studies, the authors identified three determinants to be included in the analysis: Environmental policy and external pressure (e.g. level of environmental fines), Input prices (e.g. coal and water prices), and Characteristics (e.g. location and scale). The econometric results were done for two types of water pollution, total suspended solids (TSS) and chemical oxygen demand (COD). Results show that citizen complaints have a strong negative correlation with TSS intensity, indicating that community pressure creates strong incentives for companies to improve pollution abatement. The level of pollution charge also results in a significant reduction in both types of pollution, evidence which the authors cite as consistent with other studies. While there are other results discussed on variables ranging from water to electricity price, the most important information comes from the analysis on firm ownership structure’s effect on pollution levels. The study finds that for TSS’s, SOE’s are the most polluting, followed by POEs, COEs, then FDIs. For COD, results are not statistically significant.

The empirical work done by the authors allows them to draw several important conclusions, which confirm much of the existing literature. Ownership structure dos have an affect on pollution levels. Through surveys and econometric analysis, it is clear to the authors that state owned businesses have the worst environmental track record, with domestically owned private firms coming in second. The best performers were foreign owned companies. Community owned businesses significantly outperformed private or state owned domestic firms, likely because they were more likely in practice to internalize community-level externalities.

These results suggest that economic liberalization, and through that a greater role for foreign owned businesses, may indeed have significant positive environmental effects due to efficiency and technology improvements that those types of firms are likely to employ. Those effects on pollution levels currently overwhelm additional internalization pressure that domestically owned firms face, making foreign owned companies the cleanest industrial structure operating in China.