Environmental Management of Multinational Corporations in India: The Case of PepsiCo.

March 7, 2010 Research, Volume One No Comments By Manjyot Bhan Abstract Before the 1980s, environmental regulation in India was almost non-existent. In pursuit of economic development, the Government of India (GoI) kept environmental regulation of multinational corporations to a minimum in order to attract foreign direct investment. Multinational corporations have often been blamed for taking advantage of weak enforcements in India; however, in recent years, many of them have started to self-regulate and often set their environmental standards above the minimum compliances enforced by the GoI. My research will investigate the change in environmental management of PepsiCo, Indiaan American large food and beverage multinational corporation. Introduction Since 1991, India has witnessed a dramatic increase of multinational corporation activity, giving rise to tremendous economic development of the country (Emde, 1999). From provision of services to manufacturing, multinational corporations (MNCs) play a big role in almost all the economic sectors in India. Consequently, their business operations impact the physical environment of the country on a large scale. Study of the drivers that lead to a change in the environmental management of MNCs is crucial because it identifies the positive influences leading to higher environmental standards, along with the barriers or negative influences that prevent MNCs from attaining the (higher) standards they otherwise would have followed. This information can have implications on future environmental policies and economic reforms in the country. In the post-industrialized era, MNCs in the developing world are changing their environmental management in the context of various internal and external drivers. These changes often lead to an introduction of new strategies, systems, and practices across the environmental management of MNCs (Moser, 2001). Using a case study of PepsiCoone of the largest food and beverage American multinationals in Indiathis paper seeks to answer the following questions: What are the drivers for changing environmental management of MNCs in India? What new strategies, systems, or practices are implemented in MNCs to change their environmental management? Background Before the 1980s, environmental regulation in India was almost non-existent. In pursuit of economic development, the Government of India kept enforcement of environmental compliances for Multinational Corporations (MNCs) to a minimum. Despite significant environmental policies introduced in India, such as the Water Act (1974), Air Act (1981), and Environmental Protection Act (1986), its environmental quality has continued to deteriorate (Reich & Bowonder, 1992). Indias Industrial Policy of July 1991 radically pushed for an open economy by globalization, liberalization, and privatization. The policy opened up Indias economy to foreign direct investment by providing facilities to foreign companies to invest in different fields of economic activity (Goyal, 2006). The economic policy reforms of India removed constraints for entry of MNCs into India, allowed Indian companies to form joint ventures with the foreign companies, and encouraged a free inter-country transfer of technology and labor (Goyal, 2006). An open economy, large manpower, and a weak environmental regulatory framework reduced the cost of doing business in India as compared to other developing countries such as Brazil, Mexico, China, and Indonesia (Jain et.al, 2006). Therefore, these factors made India a preferred destination of MNC activity from developed countries. To pursue my research questions, this paper introduces a conceptual framework for examining the environmental management of MNCs in India. Through this lens, the paper is able to identify the external as well as internal drivers that have changed/are changing in the environmental management of PepsiCo, as well as the new strategies implemented in the company to incorporate these changes. Framework for examining the environmental management of MNCs 1. 2.

The paper draws from the framework within organization theory and specifically on Andrew Pettigrews famous work on the management of strategic change (Pettigrew, 1987). His framework has been widely adapted to study how changes in the management of environmental and social issues by MNCs operating in less developed countries can lead to sustainable development (Moser, 2001). Pettigrew offers a framework consisting of three dimensions: context, content and process. He suggests that organizational change process and decision-making can be understood in terms of these three inter-linked dimensions. The context of change is concerned with how an MNCs internal context and aspects of external environment promote or inhibit the change process. Internal context refers to characteristics of the MNCs internal organization: its structure, culture, and politics, and how these have shaped/continue to shape its environmental management (Moser, 2001). The external context can be sub-divided into formal and informal components. The formal or institutional component of context consists of factors such as headquarter policies, host countrys (India in this case) regulatory framework, investor pressure, standard industry codes of conduct, international regulations, international nongovernmental organizations (NGOs), and media comment. The informal or socio -political component consists of factors such as brand image, risk management, competition, eco-efficiency (cost effectiveness with reduced environmental impact), and pressure from local or domestic NGOs, public, and local communities. The content dimension of the framework refers to the economic, social and environmental impacts (both positive and negative) of current MNC practices and operations. The process dimension refers to how change within an MNC is effected over time. The adoption of environmental management changes can also be understood in terms of the interrelated dimensions of context, content, and process. This paper focuses on the content and context dimensions as they apply to the case study. In the context dimension, only the external aspects containing formal and informal institutions are studied. These external aspects play the role of drivers that change the environmental management of MNCs. The content dimension is studied to direct the second research question about the implementation of new environmental strategies, systems, and practices to incorporate the changes driven or impeded by the contextual factors listed above. The parts of the framework that are discussed in the coming sections are diagrammed in Figure 1. The PepsiCo Case Study Company Profile: PepsiCo, Inc. is an American Fortune 500 company headquartered in Purchase, New York. Founded in Chicago in 1965, the company spans 200 countries. It offers over 80 products worldwide, including local variations in the different countries of operation. PepsiCo owns five different food and beverage brands: Frito-Lay, Quaker, PepsiCola, Tropicana and Gatorade. A complete profile of PepsiCos products is presented in Figure2.Given the wide range of products under PepsiCos food and beverage brands, this paper narrows its evaluation to environmental management of PepsiCos beverage products in India. PepsiCo entered India in 1989 by a joint venture (JV) with the Punjab-government-owned Punjab Agro Industrial Corporation (PAIC) and Voltas India Limited. In 1994, Pepsi ultimately bought out its partners, becoming a fully owned subsidiary and ending the joint venture (Kaye, 200 4). The companys beverage portfolio in India consists of carbonated and non-carbonated drinks and packaged mineral water. The iconic beverages such as Pepsi, Mountain Dew, 7 Up, and Mirinda fall under the soft drinks (carbonated) segment. PepsiCos non -carbonated segment broadly consists of sports drinks (Gatorade), fruit juices (Tropicana), and hydrating beverages such as Aquafina drinking water. The group has built on its expansive beverage business to support the operations at its 43 bottling plants in India (Pepsi Foods, 2010). As seen in figure 3, during 2007-08, the sales from non-alcoholic beverage sector made up 72% of its total sales worldwide. PepsiCo enjoys a 13% market share of the Indian beverage industry, and over the years its presence has got biggerespecially in the carbonated drinks (soft drinks) sector. In 2003, India was one of the top five markets for growth in the soft drinks sector. PepsiCo has invested more than $1 billion US in its Indian subsidiary (Pepsi Foods, 2010). Environmental Issues at Pepsi Co and the Indian Regulatory Environment:

The two most contested environmental issues of PepsiCo India are the quality and quantity of water extracted for its beverages, and the resulting water pollution due to the companys industrial residue. Another challenge faced by the company is the amount of plastic use and waste generated in bottling and packaging of its products. 1. Industrial water use According to Indra Nooyi, CEO of PepsiCo Inc., soft-drinks and bottle water account for only 0.04% of the total industrial water usage in India (Brady, 2007). However, given the scarcity of drinking water in India, this use still has a large impact on the population that does not have access to clean drinking water. For each liter of soft-drink produced, PepsiCo uses 10 liters of water. In total, the company uses 30 million liters of ground water per year (Shiva, 2004). The company has been alleged to practice water piracy for exploitation of ground water resources, resulting in scarcity of drinking water for the residents of the Palakkad district in Kerala, India. A study done by the Kerala groundwater department reported that the factory extracted 366,000 liters more than the permissible limits (Down to Earth, 2007). The companys factory has also been known to cause water pollution by adding toxic sludge containing heavy metals such as lead and cadmium into the nearby streams (Shiva, 2006). Under the Clean Water Act of 1974, the GoI has not set any formal standards for the industrial use of clean and portable water in their food and beverages, and neither does it have any formal regulation for non-point source of industrial pollution (Kaye, 2004). In addition, neither the Prevention of Food Adulteration (PFA) Act of 1954 nor the Fruit Products Order of 1955the mandatory acts for regulating the quality of beverage contents in India regulate pesticide content in soft drinks (CSE, 2003). In 2003, a study led by the Center for Science and the Environment (CSE), an environmental NGO in New Delhi, nationally released reports confirming that soft drinks of Pepsi and Coca-Cola contained pesticides. The samples were found to be 24 times above the general standards finalized (but not notified) by the Bureau of Indian Standards (InfoChange, 2006). Observing an outright disregard of BIS standards, in 2005, the Drinks and Carbonated Beverages Sectional Committee of the BIS introduced higher standards. However, it is alleged that the Union Ministry of Consumer Affairs may have asked the BIS to defer setting standards, since there was no significant improvement in the level of pesticides in the following batches (InfoChange, 2006). Snowballing into a national public health scare, in 2006, seven out of 24 states in India, including government-run schools and colleges, banned both Pepsi as well as Coca Cola (Kaye, 2004). 2. Industrial plastic waste management PepsiCo India has been criticized both by consumers and environmental NGOs for the environmental waste created by bottling their drinks. In 1994, the beverage giant experienced national antagonism over its alleged contamination of the countrys environment through the dumping of plastic waste. Indian environmentalists, along with Greenpeaces Toxic Trade Project, investigated PepsiCos involvement in both production and disposal of plastic waste in India. The study found that in 1992, out of the 10,000 metric tons of plastic waste generated as well as imported by Pepsi and other companies, only 60 to 70 percent could be processed. The remaining 3,000 to 4,000 metric tons of plastic garbage was not recyclable (Leonard, 1994). India still lacks a system of closed loop recycling[1], and therefore the same problems persist today. At the national policy level, the Ministry of Environment and Forests of India established new Municipal Solid Waste Management Rules in 2000. These rules have failed to manage waste as a cyclic process, instead treating waste as a linear system of collection and disposal and thereby creating health and environmental hazards (Gupta, 2004). The current rules and regulations are inadequate to assess the environmental impact of waste generated at the industrial level. At its headquarters in New York, PepsiCo has been criticized for environmental waste created by bottling a drink (water) that people can get from the tap; especially because only 24.6% of PET (polyethylene terephthalate) plastic bottles used for soda, water, and other products are recycled in the US. As a result, PepsiCo has launched its new Eco-Fina bottle that uses 50% less plastic than its traditional Aquafina bottle. Even Coca-Colas Dasani brand and Nestles Poland Springs is known to have been steadily shrinking the weight of their PET plastic bottles (Bauerlein, 2009). Applying the framework: Changes in the Environmental Management of PepsiCo, India

This section uses the framework described at the beginning of this paper to illuminate the changes made in the environmental management of PepsiCo India that were prompted by the environmental issues described above. Only the content dimension and the external part of the contextual dimension of the framework are applied to this case study. The content dimension highlights the nature of change in the environmental management of PepsiCo. It refers to the new environmental strategies, policies, or systems that PepsiCo has adopted. This dimension also reveals the underlying environmental strategy followed by the company: its central objectives, source of strategy, and the extent to which the strategy is implemented (Pettigrew, 1987). Following the various environmental issues faced by PepsiCo, the company has made periodic changes in its environmental management. Since 2006, PepsiCo has adopted the mantra of Performance with Purpose. It initiated two main programs to attain environmental sustainability: Replenishing Water and Waste to Wealth. The Replenishing Water program addresses the problem of water quality and ground water depletion by introducing the concept of a positive water balance. The programs adopted under this umbrella at the community level are: InPlant Water Recharge and Harvesting and Zero -Water Discharge. As a part of the overall program, PepsiCo has partnered with TERIa scientific research organization in New Delhi to enhance and rejuvenate local water bodies in the states of Karnataka and Uttaranchal. The Replenishing Water program has achieved a current recharge rate of 300 million liters of water every year. To provide safe water and sanitation for communities in developing countries, the PepsiCo has partnered with Water Partners[2] and the Safe Water Network[3] to improve rural water in India. Figures 4 and 5 show the improvement of water efficiency and reduction of water consumption for manufacturing at PepsiCo worldwide in 2007-08 and in India from 2006 to the year 2009, respectively. Part of the Waste to Wealth program is directed towards reducing material waste through sustainable packaging and recycling of waste generated at its bottling plants. PepsiCo now uses light -weighting in its packaging which is costeffective, generates less waste, and reduces the amount of energy and raw materials, such as plastic, that are used. In the United States, PepsiCo has launched half-liter bottles of Lipton iced tea, Tropicana juice drinks, and Aquafina Alive that contain 20% less plastic than their original packaging. This reduction has saved PepsiCo more than 50 million pounds of plastic annually. The Pepsi-Cola bottles are made up of 10% recycled plastic, and rank among the most recycled packages made since 1990. Many innovations in terms of packaging reduction and resource conservation have been implemented at PepsiCo universally. In the India beverages, the carbonated soft drink crown lining has been converted to PVC (polyvinyl chloride)-free compound, removing resin and reducing cost (PepsiCo Inc., 2009). The context dimension for PepsiCo refers to the drivers that led to an action oriented change in the environmental management of the company. The external context in India motivated changes in PepsiCos environmental performance at a macro and national scale. These drivers helped managers of the company to mobilize the contexts around them, and in doing so provide the rationale for change (Pettigrew, 1987). The drivers for change at PepsiCo can be categorized as formal institutional drivers and informal socio-political drivers. With the ground water depletion issue, PepsiCo changed its environmental management primarily due to two informal socio-political drivers: the affected local communities residing in the Palakkad district in Kerala, India and CSEthe domestic NGO from New Delhi. In dealing with the issue of water pollution with toxic waste and pesticides, PepsiCo changed its environmental management based on a host of drivers. The formal institutional drivers are media comment, investor pressure due to fall in sales, and the GoI regulation that established new standards for industrial water use and disposal. The informal drivers attributed to the change are protection of brand image, consumer pressure, and the pressure of domestic NGOs and environmental agencies. For changes made in PepsiCos packaging, headquarter environmental policies and reports revealed by Greenpeace can be identified as the two main institutional drivers. The informal drivers for this move are: protection of brand image, rise in environmental concerns of its consumers, competition, risk management as a result of its falling shares, and attainment of eco-efficiency. Conclusion

Using the conceptual framework explained above, this paper identifies the main drivers leading to change in environmental management in PepsiCo, India. These key drivers have spurred reduction in the companys water use, enhancement of water quality, and reduction of packaging waste. The majority of the drivers fall under informal socio-political institutions rather than formal institutions such as host country regulations and policies followed at the headquarters. This shows that one of the weakest drivers causing a change in the environmental management of an MNC such as PepsiCo is the domestic regulatory standards in India. It highlights the minimum role played by the GoI in assuring a positive change in the environmental standards followed by an MNC in India. These findings show the need for greater enforcement of environmental compliances by the regulatory bodies of India. They also emphasize the potential role of MNCs to act as change agents and collaborate with environmental NGOs and the GoI to formulate a stronger regulatory environment for India. Appendix

FIG.1 THE ENVIRONMENTAL MANAGEMENT NEXUS OF MULTINATIONAL CORPORATIONS (ADAPTED FROM: PETTIGREW 1987; MOSER 2001)

FIG.2 PEPSICOS POPULAR FOOD AND BEVERAGES BRANDS (SOURCE: PEPSICO CORPORATE SUSTAINABILITY REPORT 2007-2008)

FIG.3 HIGHER PERCENTAGE SALE OF WATER AND BEVERAGE PRODUCTS AS COMPARED TO FOOD AND SNACKS AT PEPSICO OUT OF $75 BILLION FOR 2007-08

FIG.4 OVERALL WATER EFFICIENCY IMPROVEMENT AT PEPSICO (SOURCE: PEPSICO CORPORATE CITIZENSHIP REPORT 2008)

FIG. 5 REDUCTION OF WATER USED FOR MANUFACTURING AT PEPSICO INDIA, IN 2009 SINCE THREE YEARS (SOURCE: HTTP://WWW.PEPSICO.COM)

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