Trade-based adoption of voluntary environmental programs in the developing world: Racing to the top or stuck in the mud?

Scholars have consistently found that firms in developing countries adopt voluntary environmental programs (VEPs) in high numbers when their major trade partners are home to many VEP-certified firms. This reflects the following dynamic: Importers based in countries with many VEP-certified facilities demand similarly sustainable production processes from trade partners, and so exporting firms in partner countries adopt VEPs to signal their sustainable practices. Studies have identified characteristics of developing countries that make local exporting firms more likely to adopt VEPs as a signal; however, there has been little analysis as to the country-level characteristics that make importers more (or less) likely to demand VEPs from suppliers abroad, beyond having many VEP-certified firms themselves. This study considers this matter, theorizing that VEP diffusion only accompanies exporting to countries with high levels of income and education, as well as a high number of VEP-certified firms. Panel data analysis provides support for the theory, showing that developing countries only experience trade-based diffusion of ISO 14001 (a widely adopted VEP) through their exports to countries with high income and/or education levels. In contrast, exporting to countries that lack these characteristics creates no such diffusion, even where importing countries’ VEP certification levels are high. Instead, such trade produces a “stuck in the mud” effect, as developing countries’ certification levels stagnate even as those of their import partners rise.