Taxation for Environmental Protection: A Multinational Legal Study

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This book brings together the work of scholars from England, France, Germany, Sweden, and the United States to examine the ways in which industrialized nations have used and are developing tax laws to help alleviate environmental problems. For each country, the contributors offer a thorough review of existing and proposed initiatives and an in-depth evaluation of their effectiveness.

They also discuss the theoretical framework behind environmental tax initiatives, explain alternative systems to taxation, reveal problems in dealing with environmental concerns that are common to all of the countries studied, and suggest ways to more efficiently coordinate tax and environmental policies. Based on their research, the contributors conclude that the general tax systems of the United States and other countries unintentionally conflict with environmental policies and that no country has yet been able to adequately control automobile pollution, although some have had varying degrees of success in other areas.

The volume begins with an introduction that presents a nontechnical discussion of the current economic thinking on environmental taxes and alternatives such as direct government regulation and granting polluters limited or tradable rights to pollute. The following chapters discuss each country in turn. Each chapter first examines the institutional framework of the country--central versus regional government, how legislation is enacted and executed, the distribution of authority over environmental matters, and important environmental policy goals.

Next, the compatability of the tax system with environmental goals is analyzed. Finally, there is a thorough treatment of that country's environmental tax initiatives, including an in-depth assessment of their relative success or failure. Policymakers, lobbyists, economists, and attorneys will find Taxation for Environmental Protection enlightening reading. Read more Read less. H5: The larger the support of the government of the firm's country of origin , the more likely the firm will be to choose a joint venture, rather than a wholly-owned subsidiary.

Size - Firm size, a proxy for its financial resources, can be considered one of the most important ownership advantages of the firm Dunning, Thus, in studies on entry modes, firm size has been frequently used, either as an independent variable, or as a control variable e. When establishing a wholly-owned subsidiary in a foreign country, a large firm could achieve economies of scale and scope, reducing its marginal cost Meyer, H6: The larger the size of the firm, the less likely the firm will be to choose a joint venture, preferring to establish a wholly-owned subsidiary.

Several factors can cause industrial companies and service providers to make different choices in their entry mode. For example, industrial firms are more subject to the uncertainties of the physical environment, while firms in the service sector are more susceptible to behavioral cultural issues. Therefore, firms engaging in manufacturing prefer joint ventures in environments with high levels of uncertainty, but when faced with behavioral problems they tend to choose wholly-owned subsidiaries.

H7: Firms in the service sector are more likely to choose a joint venture than a wholly-owned subsidiary. Therefore, the conceptual model of the study proposes that the ownership mode adopted by a multinational firm in a host country is influenced by the host-country institutional environment and firm characteristics Figure 1. The dependent variable, ownership mode, was measured using a dichotomic variable wholly-owned subsidiary versus joint venture. Figure 1.

Conceptual Model of the Study. Table 1 presents the operational variables used for the constructs Regulatory Quality, Normative Distance, and Cognitive Distance. The firm's international experience was measured by the number of countries in which the firm had operations before establishing the specific subsidiary cf. State support was operationalized as a dummy variable; a company received state support if it was state-owned, the government was a minority shareholder, or the firm had long-term subsidized government financing.

Size was measured by company gross sales, similarly to Demirbag, McGuinness and Altay's study. Economic sector was operationalized as a dummy variable manufacturing or services. The study is cross-sectional and ex post facto. The research method adopted was a survey of Brazilian multinationals, and the unit of analysis was the foreign subsidiary of a Brazilian multinational. There is no official and exhaustive list of Brazilian companies with foreign operations and their subsidiaries.


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The list includes all types of multinationals independent of size and of connections with the bank, and is considered the most complete and reliable list of Brazilian multinationals available in the country. Only subsidiaries with value-added activities were considered part of the target population; subsidiaries in tax-haven countries were excluded. A total of companies fulfilled the selection criteria, with subsidiaries spread across 84 countries. A maximum number of four subsidiaries by company was set in order to avoid excessive weight of a small number of large companies with many subsidiaries.

Thus, the target population was reduced to subsidiaries of companies. The respondent was, preferably, a Brazilian executive, CEO of the foreign subsidiary, who had participated in the decision to establish the subsidiary, or as close as possible to this profile. The sample was non probabilistic, due to the lack of a comprehensive list of the population, the occurrence of non-response, and the fact that companies with more than four subsidiaries self-selected which of their subsidiaries were to be included in the sample.

We proposed the following criteria for selecting the subsidiaries: a the subsidiaries should have strategic relevance for the company; b the choice of the host country should have been based on previous studies before the decision was taken. To identify a potential non-response bias, non-parametric tests were conducted to verify whether non-respondents differed significantly from respondents in terms of the geographic location of their headquarters in Brazil and level of economic development of the subsidiary's host country; differences between the two groups were non-significant for both variables, suggesting the absence of non-response bias.

The data collection instrument was a self-administered questionnaire with closed-ended questions and 5-point Likert-type scales. Questionnaires were submitted to the scrutiny of five specialists university professors in the area of International Business and executives from BNDES and pre-tested with five executives from Brazilian MNEs. The questionnaire was posted on the internet, as well as sent by e-mail to the respondents that indicated a preference for this means of data collection.

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Returned questionnaires were examined to detect potential errors, and several respondents were contacted to clarify issues as well as to fill in missing data. Finally, an analysis of outliers and missing data was conducted. Exploratory factor analysis was used to investigate the perceived dimensions of the host country institutional environment and therefore reduce the data to a manageable number of factors Table 2.

Data was examined to ascertain that it filled the requirements of factor analysis; correlation matrices showed a reasonable number of significant correlations, the results of the Bartlett's tests were significant and the values of MSA in the KMO tests were considered adequate. The analysis used principal component analysis and orthogonal varimax rotation; the factors extracted had eigenvalues greater than 1.

Reliability was checked using Cronbach's alpha; all coefficients were greater than 0. The first factor, Quality of Government Institutions, included six variables commonly used in international business literature to measure government effectiveness and rule of law. The second factor, Prevalence of Market-based Arrangements, combines three variables related to government controls that affect doing business.

The three factors of the construct Normative Distance together explained The first factor, Values, includes three variables: importance assigned to leisure and entertainment, valuing security, and focus on professional success. The second factor, Beliefs, includes the conviction that one should not question management's authority, that it is important to stay in the same company to go ahead, and that it is important to work in a prestigious company. Finally, the two factors of the construct Cognitive Distance together explained The first factor, Cultural Identity, includes three variables language, colonial history, and level of education.

The second factor, Management Practices, includes three variables: the prevalence of a short- versus a long-term view, emphasis on innovation, and administrative centralization. Summated scales Spector, were used to form the independent variables to be used in logistic regression.

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Three models were tested using binary logistic regression: Model 1, only with firm characteristics; Model 2, only with factors of the host country institutional environment; and Model 3, with all factors. Casewise diagnostics led to the exclusion of nine cases, further reducing the sample to cases. Table 3 presents the model summary using the enter method. All the tests for Model 3 showed the best results.

Because of the different size of the two groups, the cutvalue was 0. The percentage of cases correctly classified was Hypotheses H1 and H2 received only partial empirical support. In the case of Hypothesis 1, concerning the Regulatory Quality, the factor that showed significant results was Quality of Government Institutions, suggesting that in countries whose regulatory environment shows a high quality of public administration companies are more likely to choose wholly-owned subsidiaries.

With respect to Hypothesis 2 Normative Distance , the factor that showed a statistically significant result was Beliefs. Note, however, that the results indicate that larger differences in beliefs would increase the probability of creating wholly-owned subsidiaries, contradicting our original hypothesis, but supporting the results previously reported by Arslan and Larimo One possible explanation for this result is that very different beliefs can make it difficult to identify a suitable partner.

Values and Relationships did not show significant results. Regarding Hypothesis 3 Cognitive Distance , both factors were significant. The results for the factor Management Practices indicate that the greater the perceived differences between the management practices of the host country and those of Brazil, the more likely it is that the firm uses a joint venture.

These results are particularly relevant when considering the small number of joint ventures in the sample, given the preference of Brazilian multinationals for wholly-owned subsidiaries. Thus, they also offer empirical support to the dominant hypothesis in the literature on ownership mode for EMNEs. Strong differences in business practices make an association with local partners interesting in order to take advantage of their local market knowledge, instead of the firm itself seeking to acquire this knowledge which would require more time and money, and could increase risks.

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The Cultural Identity factor was also significant, giving support to the importance of indicators of cultural distance and psychic distance used in the literature on ownership modes. Hypothesis 4 and 6 were not supported empirically. Hypotheses 5 and 7 showed empirical support in the hypothesized direction. The Exp B of the variable State Support was These findings suggest relevant differences in relation to multinationals from other countries, and confirm the results obtained by Dias Rocha and Silva, Rocha and Carneiro contend that Brazilian firms prefer to take full control of their businesses, a cultural preference that also appears in the high percentage of preferred shares without voting rights, but with preference in receiving dividends of Brazilian companies that go public.

These authors suggest that such behavior would be more common when firms internationalize their businesses to neighboring countries. However, a question open for discussion is whether such behavior can also be found in the initial steps of internationalization of traditional multinationals. Unfortunately that are no studies based on large samples that can help understand whether these preferences were also present in their initial choices. Two of the three hypotheses concerning the institutional environment of the host country have received only partial empirical support, suggesting that some institutional factors studied were not statistically significant in explaining the ownership mode of Brazilian multinationals.

There are several possible explanations for these results. In the case of the construct Regulatory Quality, two factors were identified but only one Quality of Government Institutions was significantly associated with the selection of wholly-owned subsidiaries, as generally predicted in the literature e. This result also supports our contention that, in the case of EMNEs, researchers should not consider the regulative distance, but rather the absolute quality of the regulatory environment of the host country. Brazilian multinationals do take into account the stability and transparency of government policies, the protection of property rights, and the efficiency and independence of the judiciary system, and such aspects influence their decision of ownership mode, in the same way they influence their counterparts from other countries.

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The fact that the factor Prevalence of Market-Based Arrangements which includes aspects related to the complexity of labor laws, government control of production factors and the presence of state enterprises distorting competition did not show significant results does not imply, however, that Brazilian multinationals prefer institutional environments with low quality regarding these aspects. The non-significant results can be explained by the Brazilian institutional environment in which these aspects are also present.

Being used to dealing with them, decision makers at Brazilian multinationals do not consider such factors important when deciding ownership mode. We contend, therefore, that because EMNEs originate from countries with poor institutional environments, researchers should be careful when evaluating the influence of regulative distance in their internationalization decision processes.

In this study, although decision makers did perceive institutional weaknesses and risks in the countries where they chose to establish their subsidiaries, part of these aspects do not seem to impact the ownership mode decision, probably because they are used to operating in an environment with similar characteristics. Again, they do not show preference, but rather less concern, for this type of environment when choosing the ownership mode. Thus, our proposal of using the absolute quality of the regulatory environment in the case of EMNEs, rather than the regulative distance, is consistent with this study's result.

The factor Beliefs, however, was significant, although in a direction contrary to hypothesized. In our study, the larger the perceived differences in beliefs, the more the firm would tend to choose a wholly-owned subsidiary. An explanation for why beliefs would significantly impact the ownership-mode decision, and values would not, may rest in the nature of these constructs.

Beliefs are not as deeply rooted and stable in time as values; they relate more to "practices", which belong to more superficial "layers of culture" cf. Hofstede, , pp. Therefore, differences in beliefs may actually impact foreign operations more than differences in values. The fact that the direction of the relationship was contrary to hypothesized is not totally surprising; in fact the literature shows ambivalent results in the relationship between ownership mode and cultural distance, a construct similar to normative distance, also including values and beliefs.

Of the 13 studies on the relationship between ownership mode and cultural distance reviewed by Harzing , six found a negative relationship, four a positive relationship, and the other three did not show significant results. As to Cognitive Distance, the factors Cultural Identity and Management Practices were significantly related to ownership-mode decision as hypothesized. Cultural Identity refers to some of the most basic differences between the domestic and the host country, those related to language, cultural roots, and education.

In addition, management practices are extremely relevant to foreign operations; large differences in management practices increase the need to adapt the firm's internal routines, and make communication between subsidiaries and the parent company more difficult. When management practices differ substantially between managers in a joint venture, the risk of conflict is increased.

Firm characteristics showed interesting results; state support and belonging to the service sector positively and significantly impacted the choice of joint ventures, while size and international experience did not significantly relate to ownership mode. Therefore, the very way to operationalize the construct International Experience may produce different results. The strong role played by state support in the choice of joint ventures is also an important finding.

State support tends to be available more often to larger firms or firms that advanced further in their internationalization process. Firms with a global scope of operations tend to be operating in countries with greater institutional distance, or in countries with greater institutional constraints to the installation of wholly-owned subsidiaries, thus potentially preferring or being forced to use joint ventures.

Therefore, these firms are more prone to get state support than smaller firms with a limited scope of internationalization. In addition, state support might have encouraged Brazilian multinationals to engage in joint ventures that they would not enter without such support, such as countries with high political risk, fragile institutions, or large cultural distance e. In these situations, having the state as a shareholder or a major source of financing might act as a protection against those risks for the EMNE Knutsen et al.

Finally, in spite of the small number of Brazilian multinationals in the service sector, a reasonable number of them are in high-tech industries, which could explain the preference for joint ventures of service firms as a way to attain legitimacy in foreign markets, since Brazil has no reputation for producing technology.

Moreover, due to the intangibility of services and the need for tacit knowledge to serve new markets, service multinationals may be seeking access to market knowledge and know-how held by local partners. These results are consistent with theoretical propositions and empirical findings in the literature e. This study aimed to contribute to the understanding of the choice of ownership mode by EMNEs. Its theoretical contribution relies in examining the phenomenon under the perspective of institutionalism in an emerging country, Brazil. The institutional quality of a country's environment is a complex and still poorly explored research area, particularly regarding the use of perceptual measures, since most studies have employed existing indicators from secondary sources.

The selection of variables to measure each institutional pillar, after a broad review of the extant literature on entry modes, may contribute to future studies, particularly to those focused on other emerging countries. The findings suggest that Brazilian MNE choice of ownership mode agrees in general with the theoretical arguments and previous studies in the extant literature.

There are, however, specific aspects that can be of interest to researchers that look specifically at EMNEs. First, the assumption that regulative distance, and not the regulatory environment in absolute terms, affects the choice of ownership mode seems not to stand for EMNEs that come from less stable institutional environments.

Second, state support showed a strong relationship with the choice of ownership mode in this study. State support has not been previously researched since traditional MNEs from developed countries do not show this characteristic, which is more typical of EMNEs. Therefore, we suggest that future studies on EMNEs should take this variable into consideration. The disposition of Brazilian multinationals to establish subsidiaries in countries with fragile institutional environments suggests that their experience in the home country makes it easier for them to operate in similar environments.

The limitations of this research are related to its scope, the methodology used and the data available. The use of perceptual measures collected directly from respondents has its advantages and disadvantages. On the positive side, the relevant variables to measure are the decision makers' perceptions of the institutional environment, and not objective measures of the institutional quality of the environment, since the former, not the latter, guide firms' investment decisions. Moreover, the perceptions of decision makers from EMNEs may be substantially different from those of executives from developed countries.

On the negative side, this type of research suffers of an ex post facto bias. Finally, sample size did not permit the use of a holdout sample; therefore our results may suffer from an upward bias in terms of the percentage of cases correctly classified. Agarwal, S. Socio-cultural distance and the choice of joint ventures: a contingency perspective.

Journal of International Marketing, 2 2 , Choice of foreign market entry mode: impact of ownership, location and internalization factors. Journal of International Business Studies, 23 1 , Anderson, E. Modes of foreign entry: a transaction cost analysis and propositions. Journal of International Business Studies, 17 2 , Arslan, A. Ownership strategy of multinational enterprises and the impacts of regulative and normative institutional distance: evidence from Finnish foreign direct investments in Central and Eastern Europe.

Journal of East West Business, 16 3 , Barkema, H. International expansion through start-up or acquisition: a learning perspective. Academy of Management Journal, 41 1 , Brouthers, K. A retrospective on: institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 44 1 , Why service and manufacturing entry mode choices differ: the influence of transaction cost factors, risk and trust. Journal of Management Studies, 40 5 , SME Entry mode choice and performance: a transaction cost perspective.

Entrepreneurship: Theory and Practice, 28 3 , Buckley, P. The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38 4 , Chan, C.

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Which country matters? Institutional development and foreign affiliate performance. Strategic Management Journal, 29 11 , Chen, H. An analysis of entry mode and its impact on performance. International Business Review, 11 2 , Contractor, F. Modal choice in a world of alliances: analyzing organizational forms in the international hotel sector.

Journal of International Business Studies, 29 2 , Cuervo-Cazurra, A. Extending theory by analyzing developing country multinational companies: solving the goldilocks debate. Global Strategy Journal, 2 3 , Cui, L. State ownership effect on firms' FDI ownership decisions under institutional pressure: a study of Chinese outward-investing firms. Journal of International Business Studies, 43 4 , Delios, A. Ownership strategy of Japanese firms: transactional, institutional and experience influences. Strategic Management Journal, 20 10 , Political hazards, experience, and sequential entry strategies: the international expansion of Japanese firms, Strategic Management Journal, 24 11 , Demirbag, M.

Perceptions of institutional environment and entry mode: FDI from an emerging country. Management International Review, 50 2 , Dias, A. Dikova, D. Foreign direct investment mode choice: entry and establishment modes in transition economies. Journal of International Business Studies, 38 6 , Dow, D. Disentangling the roles of international experience and distance in establishment mode choice. Management International Review, 51 3 , Dunning, J.

Toward an eclectic theory of international production: some empirical tests. Journal of International Business Studies, 11 1 , Institutions and the OLI paradigm of the multinational enterprise. Asia Pacific Journal of Management, 25 4 , Eden, L. Distance matters: liability of foreignness, institutional distance and ownership strategy.

Cheng Eds. New York, NY: Emerald. Erramilli, M. Service firms' entry-mode choice: a modified transaction cost analysis approach. Journal of Marketing, 57 3 , Estrin, S. The impact of institutional and human resource distance on international entry strategies. Journal of Management Studies, 46 7 , Gammeltoft, P. Emerging multinational companies and strategic fit: a contingency framework and future research agenda.

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European Management Journal, 30 3 , Goodnow, J. Journal of International Business Studies, 3 1 , Grosse, R. Management International Review, 45 2 , Harzing, A.


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