What are the Determinants of Environmental Compliance in the Chilean manufacturing Industry? A case study

In Chile, like in other developing countries, many plants avoid complying with environmental regulations because monitoring and enforcement are infrequent. On the other hand, some plants overcomply because their abatement decisions are strongly affected by factors other than formal regulation. This seems counterintuitive, because firms do not have incentives to comply with environmental regulation when there is a lack of enforcement. However, firms’ managers sometimes respond to other sorts of incentives. When firms face a lack of formal regulation, they may comply because they see incentives other than conventional enforcement. These can take the form of community pressure and sanctions from market agents in the form of informal regulation. Indeed, it seems that conventional policy discussion has been too narrow, focusing only on the firm-state interaction as the single determinant of environmental performance. Therefore, the central objective of this paper is to analyse the impact of formal and informal regulation on the level of compliance of firms with environmental regulation. Informal regulation includes two new agents, the community (local or neighbouring community, community groups or NGOs) and the market (market agents such as consumers and investors), which also participate in the process of environmental regulation through private enforcement. This paper also analyses the impact of plants’ and firms’ characteristics on their environmental performance. This research uses new evidence from a survey carried out in 700 Chilean manufacturing plants. The multivariate results suggest that in Chile there is a scope for strategies that complements conventional policy regulations.