Operational Complexity and Uncertainty in Firms ' Environmental Management System Certification Decisions : Japanese Manufacturers *

Firms choose to seek environmental management system certifications such as ISO 14001 certifications for certain reasons. Since obtaining and maintaining such certifications is costly and also voluntary, firms are choosy in deciding which of their establishments are to be certified. In this paper we put forward a hypothesis that firms seek ISO 14001 certifications for their establishments when their operations involve low degrees of complexity. Another hypothesis we consider is that firms facing more uncertainty in their operations (and hence more environmental risk) both at firm and establishment levels tend to seek ISO 14001 certifications. These hypotheses have not been previously studied in the literature. We empirically test these hypotheses using probit and duration models using establishment-level data for large Japanese manufacturers. Our findings support the hypothesis that high degrees of complexity in establishment operations deter firms from seeking ISO 14001 certifications. This suggests firms' tendency to certify more routine and less complex operations first. Our findings also support our second hypothesis that firms facing much uncertainty in their operations are likely to seek ISO 14001 certifications. The latter hypothesis is consistent with the interpretation that firms use ISO 14001 certifications as an insurance scheme. JEL classification codes: M100, M140, Q500 ------------------------------------------------------------------------------------------------------------------------------------------*Both co-authors have contributed equally to completion of this paper. An earlier version of this paper was presented at the Third World Congress of Environmental and Resource Economists held in Kyoto, Japan, July 3-7, 2006. Research reported in this paper was in part supported by research grants from the Social Sciences and Humanities Research Council of Canada. ** Masao Nakamura is also with UBC's Institute of Asian Research. 2