Towards greener pastures
as indian industry moves into a new and competitive phase as part of the global marketplace, it would be well advised to re-examine some basic tenets of corporate strategy. Conventional wisdom suggests that there is a conflict between the goals of environmental protection and economic competitiveness, and increasingly stringent environmental standards are resisted by industry because they impose an additional burden on units operating close to the margins of profitability.
Michael Porter, a professor at the Harvard Business School, disagrees. Porter believes that strict environmental regulations may actually enhance competitiveness; firms confronted with higher standards should view these not as a cost, but as a profit -making opportunity. In his book, The Competitive Advantage of Nations ( Macmillan, London, 1990), Porter finds that the main determinant of competitive advantage is not a firm's static efficiency, but its capacity for continued innovation and improvement. Well-designed environmental regulation can trigger innovation which may partially or, in some cases, more than fully offset the costs of compliance.
The same thought was echoed recently by former bureaucrat A N Yellappa Reddy ( Down To Earth , Vol 5, No 2 ) who agrees with Porter's basic hypothesis, arguing that improper pollution control affects productivity. In Porter's scheme, pollution is an indicator of unproductive resource utilisation, and improvements can continually be made in products and processes to reduce resource use and eliminate unnecessary waste.
Paul Portney, an economist at the Washington think-tank Resources for the Future, is skeptical about Porter's claims. Portney does not deny the existence of cost-saving innovations which may result from higher environmental standards, but contends that they are negligible and are not available in all sectors. For Porter, the possibility of making savings due to offsets is much more widespread. It is here that Indian industry needs to take a close look at its own operation and examine the potential for such improvements. For an economy emerging from the shadow of protection, it is reasonable to surmise that there is substantial scope for innovation offsets which would enhance profitability and improve compliance with environmental standards.
There are particular features of the Indian regulatory set-up which have encouraged industry to ignore such possibilities. The recent spate of judicial cases has revealed a considerable implementation gap in Indian environmental legislation. The pollution control boards are understaffed, poorly resourced and are not motivated enough to insist that industries comply with existing standards. The public has little access to information and is unable to participate in the regulatory process. Some cases do make it to the courts and the judges have castigated the executive for its failures; but for every high-profile case which gets a judicial hearing, there must be countless others which never get anywhere near the legal process. In such a situation, it is not surprising that industry perceives expenditure on pollution control as unnecessary and wasteful.
Such short-termism, however, is clearly not sustainable. The pressures on industry to clean up its act are increasing, both domestically and in the international market. The most profitable strategy is for industries to take the long-term view and to welcome stringent environmental regulation.
While it is necessary to stress that environmental regulation must be motivated by the socially beneficial effects of such measures, private costs to industry of compliance cannot be ignored. What the Porter hypothesis suggests is that private costs may be greatly exaggerated, and in many cases, non-existent. The most effective long term strategy is for firms to accept the reality of the regulatory environment, to think creatively and to overcome the traditional mindset which perceives an unduly sharp dichotomy between a clean environment and a healthy corporate balance sheet.