Efforts to improve environmental performance of SME: Evaluating Mexicos Green Supply Chain Program

Abstract This research assesses the economic and environmental performance of an innovative program for greening small and medium-sized enterprises (SMEs) within the supply chains of several leading manufacturers in Mexico. Proven methods techniques such as cost-benefit analysis and linear regression models are used to study relationships between firm and project characteristics, and economic and environmental outcomes. The studys database includes a sample of 1,041 firms, for the most part SMEs. The findings show how significant economic and environmental benefits can be obtained by formulating eco-efficiency projects in supply chains. Analysis of the experience also provides insights into overcoming barriers to the dissemination of eco-efficiency and cleaner production related tools for in SMEs based in developing countries. Additionally, empirical evidence adds to the green supply chain literature regarding explanatory variables of economic and environmental benefits. Keywords: Green supply chain management, SMEs and eco-efficiency, cleaner production, SME in developing countries 1. Introduction

Efforts to improve environmental performance of small- and medium-sized enterprises (SME)[1] have been initiated in most Latin American countries since the mid- and late nineties (Fernndez-Vi et al., 2010; Van Hoof & Herrera, 2007; Montalvo-Corral, 2002; Leal, 2006; Espinosa & Rodriguez, 2003; Jimenez, 2007; Blackman et al., 2009). These include the development of new regulatory frameworks related to standards for sewage, airborne emissions, waste disposal, and more recently, producer responsibility (Espinosa & Rodriguez, 2003; Milanez & Buhrs, 2009; Lindhqvist et al., 2008). Complementary economic incentives, such as tax reductions for environmentally friendly technology acquisitions, have also been implemented (Herrera, 2005; Romo, 2005). Other financial incentives include subsidies for clean technology implementation (Grutter & Egler, 2004; Blackman, 2000). Aside from these regulatory and economic mechanisms, a number of voluntary initiatives have emerged to provoke firms to improve their environmental performance. The basic idea behind these mechanisms considers that the role of government should be changed from outright intervention towards a more facilitative role, encouraging efforts by the private sector itself (Frijns & Van Vliet, 1999).
[1]

Official definitions of small- and medium-sized enterprises differ widely; generally in developed countries, employment reaches up to 500 and annual turnover up to U$D 20 million (Ayyagari et al., 2007). In developing countries, as in most Latin American countries, official SME statistics cover smaller enterprises up to 250 employees, and about U$D 2.000.000 as annual turnover (Vives et al., 2005; Zevallos, 2003).

Examples of such facilitating mechanisms include a network of national and regional cleaner production centers in almost all region countries (Ashton et al., 2002). Also, a variety of demonstration projects and technical assistance programs on cleaner production and eco-efficiency have been carried out (Fernndez-Vi et al., 2010; Giannetti et al., 201; Bednarek & Nio, 2008; Montalvo-Corral, 2004; Hilson, 2000; Blackman, 1999). Similarly, cleaner production agreements in Chile (Jimenez, 2007) and Colombia (Blackman et al., 2009), together with certification programs, such as the clean industry program (Industria Limpia) in Mexico (Blackman et al., 2010), aim to improve the environmental performance of firms. The proliferation of these cleaner production and eco-efficiency initiatives in Latin America have stemmed from a growing belief that cleaner production and ecoefficiency represent effective strategies to reduce contamination, and may even generate economic benefits (Baas, 2006; Schmidheiny & Zorraquin, 1998). Nonetheless, results reported by these cleaner production and eco-efficiency initiatives have by and large proven disappointing (Fernndez-Vi et al., 2010; Blackman et al., 2010; Parker et al., 2009; Leal, 2006; Howgrave-Graham & Van Berkel, 2006; Stone 2006a; MAVDT-IDEAM, 2005). Little involvement of SMEs, and low adoption rates of preventive measures by firms, compare poorly with experiences of similar cleaner production and eco-efficiency programs elsewhere (Parker et al., 2009; Shi et al., 2008; Van Berkel 2006; Stone 2006a; Granek et al., 2006; Friedman & Miles, 2002). Also, few programs in Latin America appear to surpass the demonstration phase, enlisting only a limited number of companies (Baas, 2006). Improvement of environmental performance by Latin American SME remains challenging, as indeed noted by Vives, Corral and Isusi (2005) in their study of some 1300 SMEs in five Latin American countries. This study shows that only about 30 percent of the firms in the sample had previously undertaken environmental protection practices. A number of constraints in disseminating relevant cleaner production and eco-efficiency concepts among SMEs in Latin America have been identified: Vives (2006:39) cites lack of resources, lack of knowledge, and the perception that there is no environmental impact. Other studies show a lack of vision and knowledge on the part of business managers (Baas, 2006; Studer et al., 2005; Hilson, 2002); lack of internal resources such as investment capital (Mitchell, 2005; Hitchens et al., 2003; Frijns & Van Vliet, 1999); limited technical know-how and information about viable cleaner practices and technologies (Van Berkel, 2006; Grutter & Egler, 2004; Hilson, 2000); little staff motivation for development and implementation of eco-efficient alternatives (Stone, 2006b; Baas, 2006); and scarce availability of tailor-made tools and strategies for environmental improvement in SMEs (Jenkins, 2004). Other scholars have proposed alternative approaches to spur eco-efficient measures by SME in emerging economies. Blackman (2006) suggests group approaches in order to impact a large and diverse collection of firms. Baas (2006), as well as Simpson, Taylor and Barker (2004) propose a paradigm shift to perceive environmental improvement as a competitive advantage. Stone (2006b) and Vickers
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(1999) highlight the importance of organizational learning as a key approach to cleaner production implementation. Seuring and Muller (2008), Carter and Rogers (2008), Srivastava (2007), and Sarkis (2002) introduce supply chain approaches as effective frameworks to engage suppliers in sustainability initiatives. A combination of these alternative approaches was used in the design of the Mexican Green Supply Chain Program (MGSCP), aimed at disseminating clean production and eco-efficiency practices among SMEs. An additional objective was to test a replicable alternative strategy for the environmental improvement of SME. The Commission for Environmental Cooperation of North America (CEC) led the pilot phase of the program. The study at hand assesses the economic and environmental performance of this innovative program, and examines how certain company features influence outcomes. Payback periods and net present values are computed for projects designed under the program, and several environmental benefits are quantified, in response to the research questions formulated: What are the economic and environmental benefits of the Mexican Green Supply Chain Program? What company and project characteristics influence the environmental and economic outcomes of this program? Study of these questions contributes to the literature by documenting an innovative diffusion mechanism for cleaner production and ecoefficiency among SMEs in Mexicos emerging economy. Additionally, it offers empirical evidence to green supply chain literates regarding explanatory variables of economic and environmental benefits. A complementary study of the same program that focuses on organizational capabilities and implementation rates of ecoefficiency projects is currently under way (Van Hoof, forthcoming). The rest of the paper is organized as follows. Section 2 presents a review of the literature and offers a simple conceptual framework for understanding our model of analysis. Section 3 describes the program under review and certain features of the program database. Section 4 details the research methodology. Section 5 presents an assessment of the financial and environmental benefits of the program, together with the results of a sensitivity analysis. Section 6 relates research results to the relevant literature and discusses implications for cleaner production and ecoefficiency dissemination through green supply chain management. Section 7 concludes. 2. Conceptual framework This section, briefly reviews the literature on cleaner production, eco-efficiency, sustainable supply chain management and its conceptual frameworks. Background information for the basic design of the Mexican Green Supply Chain program also sets the stage for the studys research framework. Cleaner production and eco-efficiency

Some authors (e.g., WBCSD-UNEP, 1998; Howgrave-Graham & Van Berkel, 2007)

point to differences in strategic intention as respects cleaner production and ecoefficiency. An early work on the subject (Baas et al., 1990) defines cleaner production as the continuous application of integrated, preventive environmental strategy to both processes and products to reduce risks to humans and the environmental..... On the other hand, Stefan Schmidheiny, in his noted publication Changing course (1992) defined eco-efficiency as creating more goods and services while using fewer resources and creating less waste and pollution... Both concepts assume that contamination is a result of the ineffective use of raw materials, products or byproducts. Accordingly, reducing contamination results in savings in production and cleaning costs, and can contribute to favorable product differentiation in the market (Erkman, 1997). Insofar as both definitions represent prevention-oriented alternatives that aim at improvement in design, production, delivery, use, and final disposal of products, services and processes, we assume in our analysis a similar and exchangeable interpretation of the two denominations. Early publications on cleaner production and eco-efficiency (Van Berkel, 1994; Baas, 1998; 1995), placed emphasis on resource gains obtained when these concepts were applied in industrial processes such as energy efficiency, efficient water use, waste reduction, and recycling, among others. Also, methodological steps required in the design of eco-efficient and cleaner production projects were documented. A typical cleaner production (CP) methodology included: (i) project planning and organization, (ii) assessment, i.e., detailed study of processes in order to develop CP options; (iii) feasibility analysis for each option; and (iv) implementation of feasible options and establishment of an ongoing CP program (Van Berkel, 1994). Experiences were largely obtained through subsidized consultancy projects aimed to function as demonstration references (Baas, 1995; Stone, 2000). Evaluations of programs undertaken were primarily based on such initial indicators as number of companies engaged, number of projects designed, number of prevention options identified, and number of people trained (Kjaerhelm, 2005; Sage, 2000; Hilson, 2000; Van Berkel, 1998). In time, more sophisticated indicators came to be employed, such as cost-benefit analysis of environmental and economic impacts (Smith & Haigler, 2008; Nazer, 2006; Guo & Chen, 2004). These early demonstration-type approaches to cleaner production and ecoefficiency have dominated initiatives undertaken in Latin America. Typically, guides and manuals developed in the region present technical instructions on how to save energy in a production plant, reduce water use, optimize raw material efficiency, recycle waste, and propose standards of best available clean technology (CNPML&TA, 2009; CNP+LH, 2009; Prevz et al., 2007; CTPS, 2005; CET Peru, 2005). The same approach is used to classify both cleaner production and ecoefficiency related applications. Similarly, promotion of CP and eco-efficiency in Latin America centers on workshops, seminars, and demonstration programs, often carried out by external consultants, aimed largely at arousing awareness (Jimenez, 2007; Van Hoof & Herrera, 2007; Grutter & Egler, 2004; Ashton et al., 2002; UNEP, 2004). Beyond

cleaner

production

and

eco-efficiency

applications

centered

on
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environmental outcomes, other authors (Dieleman, 2007; Stone, 2006b; Zilahy, 2004; Korhonen, 2000; Vickers, 1999) propose a typology related to levels of organizational change involved in the implementation of preventive alternatives, adoption of best practices (simple adjustments in operational procedures), and technology innovation (that may require commitment of larger investments), and new activities, such as recycling or re-use). This classification rests on organizational capabilities and routines required to implement sustainability projects in firms (Boons, 2009). The aforementioned classifications of cleaner production and eco-efficiency applications are useful references for this study, and permit exploring how a firms characteristics influence costs and benefits of alternative applications. This type of analysis is especially relevant for undertaking environmental improvement of SMEs in Latin America, where firms vary a great deal in terms of management and technological capability (Milesi & Aggio, 2008; Vives et al., 2005; Zevallos, 2003). Green supply chain management

By examining a green supply chain program as a case for analysis this paper also explores how supply chains may be employed as a strategy to improve environmental performance among SMEs. As stated in the introduction, green supply chain approaches have been proposed for the generation and diffusion of knowledge and thought leadership throughout the production chain (Gold et al., 2010; Carter & Rogers, 2008; Suering & Muller, 2008; Bowen et al., 2001). Key thoughts underlying this approach are based on integrating societal and business perspectives of the benefits to be obtained from the improvement of environmental performance in a systematic way along the supply chain (Vachon & Mao, 2008; Seuring & Muller, 2008). From a societal perspective, large corporations generally cause significant impact on entrepreneurial output and network activities (Dimitratos et al., 2008); decisions on sustainability made by large companies affect the transfer of know-how in technology and management, and the enhancement of innovation for first, second, and sometimes even third-tier suppliers (Carter & Rogers, 2008; Dimitratos et al, 2008, Linton et al., 2007). Hence global supply chains become strategic channels through which environmental requirements and pressure can travel from markets in one part of the world to suppliers of the same chain elsewhere (Moltke & Kuijk, 2003). Additionally, green supply chain management can be seen as a catalyst in generating valuable inter-organizational resources, such as trust and commitment between providers and buyers (Carter & Jennings, 2002). These unique inter-firm relationships, created through collaboration on environmental issues (Gold et al., 2010), represent new perspectives and hard to imitate competitive advantages (Hart, 1995). The importance of this reasoning for leading companies is further strengthened by findings from a survey of 335 multinational companies questioned about their motives to pursue green supply chain initiatives (Aberdeen, 2008). The survey found desire to be a leader for sustainability as the most important motive (cited by 51 percent of the firms), followed closely by rising cost of energy (49
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percent), competitive advantage/differentiation (48 percent), and more distantly, by currently expected government compliance (31 percent), and rising cost of inbound and outbound transportation (24 percent). The growing literature on green supply chain management proposes a number of mechanisms for its development (Gold et al., 2010; Hines & Johns, 2001; Birett, 1998). A first approach starts with questionnaires, asking suppliers about their environmental performance. Responses to the questionnaires are often fed into existing systems employed for quality control, and may be part of the supplier selection and purchase process. A second approach, that may require more resources and commitment, centers on site visits undertaken by company personnel or third parties (Carter & Jennings, 2004). Third, mechanisms for partnering and mentoring involve close collaboration between supply chain partners. In these mechanisms, customers and suppliers work closely together on a number of levels and in a fairly integrated way, seeking to improve each others operational efficiency (Hines & Johns, 2001). Accordingly, green supply chain initiatives can be viewed as programs that transfer and disseminate environmental management practices through the entire supply chain, building on relationships between large buying firms and their suppliers (Lee, 2008). For the most part, available studies are drawn from experience in industrialized countries (Bai & Sarkis, 2010; Mollenkopf et al., 2010; Kovac, 2008; Dimitratos et al., 2008, Vachon & Klassen, 2007; Linton et al., 2007); but the concept would appear to be especially valuable when applied to SME in emerging economies such as those in Latin America, where the role of supply chains that take into account environmental criteria is increasing. Significantly, such supply chains can help overcome weak enforcement practices by official environmental agencies in relation to all but the largest local firms. The Mexican Green Supply Chain program, designed by the aforementioned CEC, builds on experience with the green supply chain concept first deployed by the United States Environmental Protection Agency (EPA). In Mexico, the program employs a public/private partnership in order to trigger leading companies to diffuse eco-efficient practices throughout SMEs. Moreover, the Mexican program indirectly respond to the call of Stone (2006b), who highlights the importance of the integration of leadership and empowerment elements in the design of cleaner production programs and methodologies. 3. The Mexican Green Supply Chain Program Following is a description of the organization and design features of the Mexican Green Supply Chain Program (MGSCP). It also specifies statistical information drawn from the program that comprises the studys database. MGSCP was created in the context of growing international trade and the difficulty to control industrial pollution caused by SMEs. In June 2004, the North American
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Council of Ministers Commission for Environmental Cooperation (CEC), following its Eleventh Regular Session, issued a public communiqu known as the Puebla Declaration, instructing the CEC Secretariat to strengthen its program, beginning in 2005, with strategic plans aimed at achieving results in three priority areas: information for decision making, trade and environment, and capacity building, with special emphasis on Mexico (CEC, 2006). The Green Supply Chains Program was designed as a way to implement this mandate. In 2008, the Secretary of Natural Resources (SEMARNAT), a member of the CEC Board, undertook to promote the program on a national scale, as part of the National Development Plan of President Calderons government. At this writing (August 2011), the program is still ongoing. Program design

The initial objective of the pilot phase of the MGSCP was to develop an innovative, multipliable mechanism for the promotion of environmental performance in small and medium-sized enterprises that participate in global supply chains. To fulfill this goal, the program design included promoting certain state-of-the art features of cleaner production and eco-efficiency promotion practices among SMEs in Latin America. The main elements of the program design may be summarized as follows: A. Public-private partnership to facilitate environmental management: the CEC, representing the interests of the three North American Free Trade Association governments, headed the programs organization. The CEC invited large private companies and their affiliates to collaborate mutually in the engagement and improvement of the environmental performance of SMEs, thus playing a facilitative role by engaging efforts of the private sector. CEC provided financial support for the operational cost of the pilot program, and the privately-owned large companies were committed to take part in program implementation. B. Supply chain power to reach out to SMEs participating in global supply chains and generate scale effects: One of the main commitments of the large private companies was to select and invite their suppliers (mainly SMEs) to participate in the program. Focal companies decided upon criteria for selection. Most of them invited their suppliers on a voluntary basis and employed geographical proximity as reasons. Groups of participating firms comprised typically one leading company and about 10-15 suppliers drawn from their respective production chain. C. Cleaner production and eco-efficiency as pollution prevention strategies: Cleaner production and eco-efficiency related strategies and tools were used to design pollution preventive alternatives in each production chain. A step-by-step approach started which the analysis of the strategic and competitive context of the firm, benchmarking successful cases and furnishing references to similar companies. To prioritize improvement options, eco-maps were prepared. Within each firm, the eco-balance tool and estimates of inefficiency cost guided the design of improvement options and their feasibility. Finally, all companies presented a pollution prevention alternative to improve the economic and environmental perspectives of their operations. Projects involved such options as best practices for
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efficient energy consumption, water and materials use, clean technology implementation, and recycling alternatives for waste reduction. Also, environmental improvements of product design and re-use alternatives were identified. D. Learning by doing approach to generate empowerment; At the heart of the MGSCP is a 10-week eco-efficiency educational training program that emphasizes learning by doing, presented free of charge to participants by a group of trained service providers. As mentioned in the introduction, most prior programs aimed at greening SMEs have employed external consultants, whose recommendations are often not implemented. The MGSCP employs a different model, in which the participants themselves make recommendations for change. Building on the ecoefficiency concepts and frameworks they were learning, companies participating in the program were required to generate projects that contribute to increasing their productivity, competitiveness, and environmental performance. Since leading companies as well as SMEs sent participants to the program, both the class experience itself and networking between the participants provided a direct opportunity for establishing relationships between clients and suppliers. More importantly, the scheme encourages the creation of group projects that improve interactions within the supply chain, and offer new business opportunities. The learning by doing training method aims at capacity building and empowerment of employees within each company as they engage their eco-efficiency projects. At the completion of each cycle of the program, there is a well-publicized ceremony to honor the participants and provide recognition for their efforts. E. Train-the-trainer to scale-up impact: In order to scale-up the outreach of the program to include a significant number of SMEs, local consultants and technical assistance centers were trained in the learning by doing eco-efficiency methodology. Financial incentives were offered to involve and retain these service providers, and a training on-the-job program was designed. Hence a network of service providers was developed throughout the country to attend supply chain groups across Mexico. Service providers were generally entrepreneurial centers in universities or technology centers known for their close relations and experience with industry. Their staff or consultants, who accompanied the supply chain groups and developed the learning by doing methodology, combined a technical and administrative professional profile; experience in business consultancy and group training was highly recommended. Execution of the Mexican Green Supply Chain Program occurred from August 2005 onwards; its pilot phase, led by the CEC, ended in May 2008. From this time onwards and up to April 2011, SEMARNAT continued the program on a national scale. The program design remained the same throughout the program. In our research, we drew on the programs database, in which the consolidated results and details of the pollution prevention alternatives are recorded. Following is a description of the research methodology and the general statistics of this database. 4. Research method

In order to assess the economic and environmental benefits of the Mexican Green Supply Chain Program and study the variables that influenced these outcomes, we employ cost-benefit analysis. Companies commonly employ cost-benefit analysis to make management decisions on projects (Souza et al., 2009; Evans et al., 2006; Nazer, 2006; Guo and Chen, 2004; Dijkmans, 1999; Yang et al., 1997). In economics literature, cost-benefit analyses are also used for decision-making regarding public support for environmental programs and strategies (Hanley & Spash, 1993). These applications differ in unit of analysis (programs vs. companies or specific projects), but share the same techniques (Ahlroth et al., 2011). The advantage of this methodology lies in the quantification of economic and physical material and energy flows resulting from sustainability efforts. The existing procedure of a cost-benefit methodology computes net present values (NPV) of specific actions (Hanley & Spash, 1993). Cost-benefit analyses often concern projects with an impact in the future. This is especially important for preventionoriented alternatives and programs, where benefits are reaped from the noneoccurrence of environmental contamination and related economic costs (Van Berkel, 1994). To compute the present value of benefits and costs that occur in the future, discounting is used. The discount rate is typically described as consisting of two parts, the pure time preference rate and a factor linked to the growth rate of consumption and risk in a particular country in this instance, Mexico (Banks, 2010). Hanley & Spash (1993) define eight stages that describe the essential steps of a cost-benefit analysis. Considerations used in each of these stages for this research are noted: I. Definition of the unit of analysis: In our research we use four different levels of analysis. We compute economic and environmental benefits of the ecoefficiency projects designed, the accumulated investments and benefits of each company participating in the program, the summarized results per supply chain group, and the overall total for the program. II. Identification of project impacts: We analyze benefits resulting from the ecoefficiency projects designed by firms participating in the program, but do not consider displacements of these benefits (Tan, 2000). All companies that took part in the pilot phase of the program respond to the selection bias, based on their willingness to take part in an innovative sustainability-related experience. Hence participating firms are by definition not representative for the large and heterogeneous group of small and medium-sized enterprises in Mexico. III. Identification of economically relevant impacts: The impacts generated take into account direct and tangible economic outcomes resulting from the implementation of the designed eco-efficiency projects, as well as investments required for their implementation. Additionally, we calculate the environmental benefits in terms of prevented CO2 emissions, prevented waste, and prevented water use. We use yardsticks to relate impacts to the Mexican context. We do not estimate the economic value of social benefits associated to these positive environmental impacts, as this lies beyond the scope of our study.
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IV. Physical quantification of relevant impacts: Estimates of economic and environmental impacts resulting from detailed exercises developed by participating firms in the learning-by-doing training effort lie at the heart of the MGSCP. Results are reviewed by an experienced facilitator and publicly presented at the end of the program. V. Monetary validation of relevant impacts: Calculations of economic benefits are based on the identification of all tangible costs incurred by a firm in the event the designed preventive alternative(s) are not implemented. These inefficiency costs involve such items as, e.g., lost raw material costs, lost machinery costs, cleanup cost, and lost opportunity costs. The same principle applies in the calculation of environmental benefits. Input-output models of specific processes and activities are used as a methodology to estimate inefficiencies. Investments are estimated according to market prices and the experience reported by representatives of firms involved. In addition to these outlays for the ecoefficiency projects, operation of the MGSCP also involved payments to service providers who led the training programs for supply chain groups. Estimates of these costs were obtained from the program administration of coordinating institutions CEC, SEDESU, and SEMARNAT. Logistics expenses such as meeting rooms and materials furnished by supply chain leaders were not taken into account. VI. Discounting of costs and benefit flows: Net Present Value of economic and environmental benefits is computed taking into account the time value or time preference. A specific method to calculate discount rates in emerging markets is employed (Villareal, 2010). This method considers the specific rates applicable to Mexico, such as the country risk and spot rate. Standard time periods ecoefficiency projects are expected to last are estimated. These time periods depend of the type of projects designed, such as best practices, process adjustments, new technology, and waste recycling. For each of these types of projects the following periods are assumed: best practice, 3 years; process adjustment, 3 years; technology change, 5 years; waste recycling, 5 years (Gradl et al., 2009; Hegde et al., 2000). Details for estimating the discount rate and the NPV method employed are presented in Appendix A. VII. Applying the net present value test: The NPV test helps select projects and programs, which are deemed efficient in terms of resource use (Hanley & Spash, 1993: 17). This research computes net present values and payback periods of projects as a commonly used managerial decision making indicator in SME (McLellan et al., 2009). The NPV and payback periods are illustrated in graphs that depict the distribution of values for different types of projects (McGill & Turkey, 1978). Additionally, linear regression analysis is applied to evaluate the variables that influence program outcomes in order to address the second research question What variables influence environmental and economic outcomes of the Mexican Green Supply Chain Program? To do so, the research model considers net present values as the dependent variable, and characteristics of firms and project types as independent variables. Figure 1 illustrates our research model for the regression analysis.

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Figure 1

Research model for evaluation of the MGSCP.

The relationships between the independent and dependent variables are analyzed by means of a linear regression model with dummies, where ordinary least squares (OLS) estimators are calculated using STATA 11. This method permits analysis of the individual effect of project types, controlling for firm characteristics. The models distinguish between three different variables with their categories. Each of these variables is controlled by one category to prevent multi-colinearity (Gujarati, 2004; Gulati et al., 2009). Appendix B presents the variables, together with their categories and dummies. Natural logarithms for NPV and square roots for paybacks are calculated to reduce variance (Hanssen & Asbjrnsen, 1996). Separate models are elaborated to analyze the different typologies described in the research framework:
Model 1

Where:

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 Model 2

Where:

VIII.

Sensitivity analysis: Sensitivity analysis only varies the project duration from 3 to 5 years for projects classified as best practices. Hence it gauges the robustness of the research model and its results. Program database

The program database contains information about all the companies that participated in the program from August 2005 to April 2011. In total, the database contains information of 119 supply chain groups covering 1041 companies that formulated 2139 pollution prevention projects. The database covers a detailed description of their characteristics. Data was gathered from a number of sources. First, all firms participating in the program filled out an intake form, reporting general features such as main activity, number of employees, sector to which they belong and information on the number of participants per firm taking part in the program. Another important source if information was the final project presentation, based on results of the ten-week training program. These presentations contained detailed information about the type of preventive alternatives to be implemented, estimated investment, and planned economic and environmental benefits. All information was registered in an Access database. The researcher coded the

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type of projects: the first classification type employed as main criterion the levels of organizational change required to implement cleaner production alternatives. Three different types of projects were distinguished: (i) best practices (63%), (ii) cleaner technology (32%), and (iii) new activities (6%). A second typology to classify the projects employed resource benefit as the criterion. Accordingly, the classification featured the following categories of projects: (i) energy efficiency (45%), (ii) water efficiency (15%), (iii) raw material efficiency (12%), (iv) residual valuation (15%), and (v) projects with combined impacts (12%). Participating companies were also classified by size and type of supply, such as packaging, printing, raw materials, indirect supplies [ 2 ] and services. Descriptive statistics for the main date base characteristics are summarized in Table 2. Table 2 Descriptive statistics of the Mexican Green Supply Chain Program
Items Number of supply chain groups Total Different regions (Mexican states) Number of leading firms Multinationals (origin) Mexican (origin) Number of providers SME (< 250 employees) Large companies (>250) Type of providers Packaging materials Printing materials Raw materials Indirect supplies Services Number of participants Total Per supply chain Per company Number of projects Total Per supply chain Per company Planed investments (MXP) Total Per supply chain group Per company Per project Number of projects per typology 1 Best practice Technology innovation New activity Number of projects per typology 2 Energy effciciency Water efficiency Value 119 22 72 59 13 1,041 710 331 132 (13%) 64 (6%) 460 (44%) 110 (11%) 275 (26%) 2.025 18,24 1,95 2.139 17,97 2.054 $702.157.574 $ 5.896.928 $ 674.723 $ 328.264 1.337 (63%) 680 (32%) 122 (6%) 967 (45%) 326 (15%) 7,7 1,36 7.55 1,317 $ 12.254.489 $ 3.287.177 $ 2.086.685 Standard Deviation

Indirect supplies are identified as materials, purchases and supplies used in the operation of the business, not directly associated with production and are part of operating expense (Choi & Hardly, 1996).
2

13

Raw material efficiency Residual valuation Combined savings

265 (12%) 329 (15%) 252 (12%)

Source: Author records

The different supply chain groups covered 22 of Mexicos 32 states. The regions where most groups participated were Mexico City and Queretaro. A total of 72 leading companies participated together with 1041 suppliers, with several firms participating in multiple groups. These multiple group participants included Alpura (milk products), Grupo Modelo (beer), Jumex (foods), Nestle (foods), Bristol-Myers Squibb (pharmaceuticals). Most of the suppliers are classified as small and medium-sized companies (68%). Supplies ranged from packaging (13%) and printing materials (6%) to raw materials (44%), indirect supplies (11%), and services (26%). On average, two persons from each company participated in the training program. In total, participating companies formulated 2,139 projects, which represents our population for purposes of analysis. Of the original database, 145 observations (projects) were withdrawn, due to reports with incomplete information. The next section presents the results of the cost-benefit analysis, beginning analysis of the overall program, followed by supply chain groups, firms, and individual projects. Results of the sensitivity analysis follow. 5. Findings The total net present value of the planned economic benefits of the program adds up to an impressive MXP 2,858,107,111 (about USD 233 million 3).The arithmetic mean per supply chain is MXP 24,018,082 (about USD 1.96 million 2) per company, MXP 2,745,221 (about USD 224 thousand 2): and per project, MXP 1,336,188 (about USD 109 thousand2). These figures reveal the attractiveness of the projects. All project present payback periods are estimated at about one year or less. The relatively large standard deviations illustrate the great diversity in types of projects and potentials of specific chains and firms. The sensitivity analysis explains these differences. Table 3 shows the net present values of the program, the supply chain groups, the firms, and projects resulting from the Mexican Green Supply Chain Program. Table 3. Net Present Value of the planned economic benefits of the Mexican Green Supply Chain Program, per unit of analysis
Unit of analysis Net Present Value a (MXP) Standard deviation Payback period (years) Standard deviation

Whole

program (August 2005 April 2011) (n = 1)

$ 2,858,107,111

Exchange rate: $ 1 USD = $ 12.2687 MXP; www.exchange-rates.org (August 5, 2011)

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 Average per supply

chain group (n = 119) Average per firm (n = 1041) Average per project (n= 2139)
a

$ 19,365,692.95 $ 1,972,095.76 $ 931,493.60

$17,855,334.04 $ 3,846,418.32 $ 2,229,341.15

0.79

0.73

0.81 0.79

1.51 1.96

Assumptions made to compute NPV are shown in appendix A

Table 4 presents the results of the environmental benefits of the program as a whole. The table distinguishes between energy savings, water savings, wastereduction and raw material prevention. Yardsticks are adjusted to Mexican realities (such as average family size, water consumption, and waste generation) to interpret the dimensions of environmental benefits. Values are estimated taking into account the lifetime of the projects with a duration, depending on type, of three to five years (See Appendix A for an explanation of this assumption). Table 4. Net Present Value of the environmental benefits of the Mexican Green Supply Chain Program
Unit of analysis (whole program August 2005 April 2011) Energy savings (Ton CO2) Water savings (m3) Waste prevention (ton)
a

Value (MXP) 1,673,168 19,045,304 737,805 1,243,312

Prevention of raw materials (ton)

Yardstick a 325,728 cars compacted 37,811 families of 5 members / year Waste generation / year of a village of 2,021,385 habitants

Yardsticks based on data from SEMARNAT, 2010

The high values recorded for standard deviations predict considerable heterogeneity among the different types of projects. To deepen understanding of the benefits generated, the relationship between investments and net present value of economic benefits of singular sorts of projects is analyzed by using the different typologies of project calcifications discussed above. A first classification takes into account projects based on the organizational change required for implementation. Accordingly, the first grouping of projects designed distinguishes between (i) best practices (small adjustment, requiring relatively little change), (ii) technological innovations (requiring more complex organizational change) and (iii) new activities (which also require greater organizational change). Figure 2 provides insights into the net present value (NPV) of these types of projects. Differences in NPV are shown for projects classified as best practices, vis-vis technology innovation and new activities. New activity projects feature a higher NPV than projects classified as best practices and technology innovation. Paybacks for new activity are also shorter than technology innovation, and comparable with best practices. This suggests new activity projects require comparatively little
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investment and generate attractive financial return. Technology innovation projects feature higher return rates on investment than projects classified as best practices; payback periods are larger as a result of outlays investments required for implementation. The square root of the paybacks also indicates that average payback periods for all projects are less than one year. Figures 2 and 3 illustrate the incidence of outliers for NPV and payback periods. Differences in outlier presence as between NPV and payback can be explained by the scale used: natural logarithm for NPV, and square root for payback. Outliers in Figure 2 mainly show up in the best practices category. This category spans a relatively broad range of preventive alternatives.
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best practices

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Figure 2 Relationship between Net Present Value and Payback periods, and project type (best practice, technology innovation, new activity) The second typology of project classifications is illustrated in Figure 3. Projects involving combined environmental savings show higher NPV than other types of projects. Projects involving energy savings and water savings seem to feature a lower NPV than those involving raw material savings and residual valuation. This suggests that relative costs for energy and water use are relatively lower than costs for raw materials and waste management. The latter costs are related, insofar as residual valuation may imply raw material savings, as waste is recycled. Projects involving water savings seem to be less attractive in terms of economic benefits; these types of projects generate a relatively lower NPV and larger payback periods. Perhaps the explanation lies in the subsidized water prices that make this resource relatively cheap in comparison to other resources. Outliers in Figure 3, related to water efficiency, can be explained by the small variance in this category and the comparatively small number of observations in our database featuring evidencing water efficiency projects.

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Figure 3. Relationship between NPV and Payback period, and project type: combined savings, energy efficiency, water efficiency, raw material efficiency, and residual valuation.

To analyze the statistical significance of trends identified by Figures 2 and 3, a linear regression analysis is calculated, controlling for supplier type and firm size. Appendix B presents the different variables and categories. The results of the regression analysis are shown in Table 5 (Model 1) and Table 6 (Model 2). Model 1 differs from Model 2 taking into account different typologies of eco-efficiency projects in the regression calculation. The results of the regression analysis are consistent with findings depicted in Figures 2 and 3. Analysis of each model shows how as many as 1,041 companies designed 2,139 projects with a positive NPV. Details for each variable are discussed as follows: Firm size: Smaller-sized companies design projects with a lower NPV. For micro-, small- and medium-sized firms, Table 5 shows statistically significant differences with our control variable large-sized firms. Negative coefficients illustrate a significantly lower NPV as compared to large firms. Coefficients confirm that smallsize firms tend to design projects with a low NPV. A similar trend is observed for environmental benefits. For water savings, a reduction in firm size results in smaller water savings. Remarkably, micro-sized firms formulated projects with similar or even larger CO2 savings than companies identified as small firms. An explanation can be found in the type of alternatives designed by different sized firms aimed at obtaining CO2 savings. Most such efforts classify as best practices that imply negligible outlays and equally negligible returns. Another statistically significant relationship shows that projects designed by micro-sized firms participating in the program generate less raw material savings than larger firms that designed similar projects. Table 6 presents each of the relationships deemed significant. Type of supply: Based on the analysis developed in Model 1, firms classified as providers of indirect supplies, services and raw materials present lower economic benefits (projects with lower NPV) than suppliers of packaging materials (control
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variable). Similar evidence for the two first mentioned supplier types results from Model 2. Providers of indirect supplies show significantly lower benefits. A possible explanation of this finding may be that nearly all of these types of providers supply products with little value the lead company; hence they may be less committed to optimize their efficiency. Also, service providers show significantly lower benefits. A possible explanation may be that most service providers designed small projects in their internal operations (e.g., their own physical plant). Most service providers made no effort to improve services such as cleaning, consultancies, and transportation that could have represented higher potentials for economic savings. As respects environmental benefits, suppliers of printing materials designed projects with significantly lower CO2 savings than suppliers of packaging materials (control variable). Projects of indirect suppliers result in less water savings than other types of providers. An explanation can be found in the origin of the transformation processes related to supplies. Raw material providers contribute significantly higher residual savings than suppliers of packaging materials perhaps because raw material suppliers provide relatively higher volume material-flows with fewer added values than packaging suppliers. This way, efficiency oriented projects result in higher volume savings. The fact that their respective project NPV values [of their projects] are significant less, confirms this idea. Project typology 1: Findings presented in Table 5 confirm the interpretation of Figure 2. This means that projects classified as technological innovation and new activity feature significantly higher NPV than best practices (our control category). Technology innovation projects feature significantly higher CO2 savings than best practices. This is to be expected, as this type of project includes structural adjustments for example, redesign of lighting systems, installation of capacitor banks, or replacement of existing machinery. Projects classified as new activities show significantly lower CO2 benefits than best practices. The latter often include energy-savings related to CO2 reduction, while new activities mainly include valuation of waste streams. A similar argument also explains the significantly higher benefits related to water savings and residual savings. Use of rainwater and re-use of wastewater is identified as a new activity within this study. Table 5 summarizes the outcomes of the linear regression under Model 1. Table 5 Outcomes of linear regression, Model 1
VARIABLES Medium Small Logarithm of dependent variable NPV Model 1 -0.501*** (0.0920) -1.107*** (0.111) Savings CO2 Model 1 -4.551*** (1.486) -8.663*** (1.372) Square Root of dependent variable Raw Material Savings Water Waste Savings Savings Model 1 -22.39*** (5.090) -27.60*** (5.120) Model 1 0.0243 (1.000) -0.204 (0.807) Model 1 -1.375 (1.371) -1.471 (1.206)

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Micro Printing Raw material Indirect Supplies Services Technology innovation New Activity Constant

-1.190*** (0.210) -0.362* (0.202) -0.239** (0.120) -0.765*** (0.160) -0.622*** (0.134) 0.466*** (0.0894) 0.474*** (0.174) 13.16*** (0.124)

-8.618*** (1.868) -4.631*** (1.387) 1.220 (1.397) 1.013 (2.958) -0.700 (1.282) 7.552*** (1.373) -6.932*** (1.109) 12.31*** (1.560) 2,139 0.046

-35.94*** (4.716) -3.744 (9.185) 6.365 (6.381) -11.48* (6.200) -5.754 (5.833) -0.00743 (4.032) 17.39* (10.09) 40.90*** (7.321) 2,139 0.029

-1.079 (1.324) -0.628 (0.766) 1.829* (0.957) -0.817 (0.604) 0.760 (0.820) -0.162 (0.962) 5.370*** (1.773) 2.017** (0.928) 2,139 0.008

-3.151*** (1.088) -1.329 (0.869) 0.387 (1.020) 2.958 (3.254) -0.797 (0.853) -0.372 (1.092) 5.209*** (1.840) 3.840*** (1.291) 2,139 0.006

Observations R-squared

2,004 0.093

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Project typology 2: Consistency of results shown in Table 6 also confirms the interpretation of Figure 3. Projects focused on energy efficiency, water efficiency, raw material efficiency, and residual valuation feature significantly lower economic benefits than projects with combined savings. Interpretation considers that projects with combined savings often involve structural changes, such as technological innovations, adjustments in product design, and/or the establishment of new activities, e.g., waste recycling. The coefficient in Table 6 illustrates the order of value of the various supplies; prevention oriented projects involving material savings result in higher economic benefits than residual valuation, energy efficiency, and water savings. The project typology used in Model 2 shows consistent results with environmental savings in the sense that energy efficiency projects are positively related to CO2 savings, and water efficiency projects with water savings. Nonetheless, raw material savings and waste savings do not illustrate significant positive relationships with projects classified as raw material efficiency and residual valuation. For CO2 and water, which represent homogeneous indicators of project savings, residues and raw materials represent a range of different types of materials and wastes with diverse volume-value ratios. Table 6 summarizes the outcomes of the linear regression under Model 2. Table 6 Outcomes of linear regression, Model 2

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Logarithm of dependent variable NPV VARIABLES Medium Small Micro Printing Raw material Indirect Supplies Services Energy Efficiency Water Efficiency Raw Material Efficiency Residual Valuation Constant Model 2 -0.522*** (0.0917) -1.143*** (0.110) -1.257*** (0.216) -0.237 (0.199) -0.136 (0.118) -0.691*** (0.159) -0.522*** (0.132) -0.637*** (0.132) -1.120*** (0.158) -0.380** (0.157) -0.559*** (0.155) 13.84*** (0.156) Observations R-squared 2,004 0.104 Savings CO2 Model 2 -5.078*** (1.403) -9.278*** (1.327) -8.783*** (1.789) -2.461** (1.243) 1.241 (1.277) 0.998 (2.863) -1.229 (1.189) 9.323*** (1.572) -11.69*** (1.195) -11.07*** (1.152) -11.10*** (1.166) 15.30*** (1.614) 2,139 0.160

Square Root of dependent variable Raw Material Savings Water Waste Savings Savings Model 2 -19.82*** (4.226) -21.63*** (4.280) -26.29*** (4.703) -5.794 (8.113) 1.886 (5.456) -12.24** (5.253) -7.743 (5.084) -47.94*** (6.482) 81.98*** (11.45) -48.15*** (6.516) -48.71*** (6.569) 64.57*** (9.144) 2,139 0.293 Model 2 0.0308 (0.988) -0.546 (0.775) -0.994 (1.293) -0.370 (0.775) 2.474** (1.056) -0.466 (0.652) 1.380 (0.874) -11.11*** (2.758) -11.27*** (2.791) -10.92*** (2.716) 0.732 (3.060) 9.820*** (2.349) 2,139 0.082 Model 2 -1.576 (1.404) -1.717 (1.188) -3.517*** (1.212) -0.930 (0.912) 1.495 (1.124) 3.650 (3.335) 0.372 (0.949) -12.10*** (3.288) -12.31*** (3.330) -5.835 (3.936) -5.078 (3.519) 12.12*** (3.050) 2,139 0.037

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

As part of the sensitivity analysis, the lifetime of projects identified as best practices is varied from three to five years, using the same linear regression models. Detailed outcomes of this sensitivity analysis can be found in Appendix C. Appendix Table A1 shows significant variations in NPV. Also, as respects environmental benefits, no significant differences regarding project lifetimes are noted. The next section discusses the aforementioned findings in light of the research questions guiding this study.

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6.

Discussion: Evaluation of the Mexican Green Supply Chain Program

The findings of this research confirm significant economic and environmental benefits from projects designed and put in place under the Mexican program, and provide insights on the variables influencing these economic and environmental outcomes. All projects feature paybacks of one year or less. Also, net present values are for the most part attractive. Divergence of paybacks among different types of projects appears small. Yet projects identified as new activities, in most instances residual valuation, are in economic terms the most beneficial as they require relatively small investment and result in high return rates. These results illustrate the high potential for optimization of waste recycling projects in Mexican supply chains. Projects classified as technology innovation feature higher economic[ al] and environmental benefits than projects identified as best practices. Most observations of best practices are related to energy efficiency projects. This information about possible outcomes of eco-efficiency projects makes it possible to focus the tools and cases applied in the MGSCP training program in a way certain economic results or certain types of environmental benefits can be maximized. The short payback periods and attractive net present value of the projects suggest that cleaner production and eco-efficiency applications implemented under the Mexican program are not subject to the commonly cited limitation of access to investment capital as a barrier for environmental improvement (Mitchell, 2005; Hitchens et al., 2003; Frijns & Van Vliet, 1999). They also indicate that there are still available numerous low-hanging fruit (Van Berkel, 1994) for efficiency optimization of supply chains participating in the program. Accordingly, mechanisms examined under the MGSCP promise high potential for improving competitive strength and sustainability improvements in similar settings of productive chains. The findings also clearly prove that firm size is positively related to economic and environmental benefits. Larger firms design projects with larger economic and environmental impacts. This suggests lessons for SEMARNAT and other leading Mexican institutions and companies participating in the program: search out other large companies as further efforts toward environmental progress in supply chains are pursued; conversely, lower tradeoffs must be accepted to the extent program participants consist mainly of smaller companies. Firms identified as packaging and raw material suppliers generate, on average, projects with greater economic benefits than providers of indirect supplies and services. The effect of supply type on environmental benefits is less clear. This research only shows some significant outcomes in relation to CO2 and water savings. Projects designed by printing firms and indirect supplies have significantly smaller environmental savings. Accordingly, this research provides clear guidelines for selecting suppliers to be invited in future initiatives of a similar nature. The wide range of different projects designed by diverse firms illustrate that cleaner production and eco-efficiency tools, such as eco-maps, eco-balances, and inefficiency cost, apply to a wide range of different-sized enterprises. This finding
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contradicts Jenkins (2004), who holds there is a lack the lack of tailor-made tools and strategies for environmental improvement in SMEs. A comparison of innovative design features of projects under the Mexican program with traditional technical assistance mechanisms elsewhere suggests the following MGSPC project features may be noted: First, job-floor personnel can identify and design for themselves viable cleaner production and eco-efficiency projects, without need of specialized external consultants. As respects on-the-job training, part of the learning by doing method (Stubbs et al., 2006) employed in the Mexican experience, as well as cleaner production and eco-efficiency applications, are similar to those traditionally designed by external specialists. By means of the learning by doing method, several barriers to environmental improvement in SME can be overcome, e.g.: (i) lack of vision and knowledge of business managers of the attractiveness of cleaner production and eco-efficiency alternatives (Baas, 2006; Studer et al., 2005; Hilson, 2002); (ii) lack of technical know-how and information about attractive cleaner practices and technologies (Van Berkel, 2004; Grutter & Egler, 2004; Hilson, 2000); and (iii) lack of empowerment and motivation of staff involved in the development and implementation of preventive alternatives (Stone, 2006b; Baas, 2006). Second, the use of supply-chain-power to reach out to a significant group of local SMEs and larger providers appears to be an effective strategy. In less than six years, the Mexican initiative reached out to as many as almost 1,500 companies nationwide. Transaction costs to involve firms in sustainability initiatives are brought down, which is especially important in developing countries where institutional capacity is weak (Blackman, 1999). For example, in the state of Queretaro over 200 companies participated in the program, yet the regional environmental authority SEDESU [ 4 ] employs less then 10 inspectors for all its command and control activities. These interpretations echo Blackman (2006), who proposes group approaches as strategies to connect SMEs in developing countries to sustainability action. The idea of using client-supplier relationships to involve SMEs also overcomes the barrier identified by several authors (Baas, 2006; Grutter & Egler, 2004) who emphasize the lack of external pressures for stakeholders as a main limitation in decision making for environmental improvement of firms. Lastly, the results illustrate how a voluntary mechanism developed by means of public-private partnerships can generate significant environmental improvements. The accumulated environmental benefits of the program are equivalent to the impact generated by of a small city with a population of about 40,000. Moreover, the economic benefits of the program expressed in net present value are equivalent to the annual minimum wage of 170,000 5 Mexicans. Accordingly, voluntary mechanisms stand to play an important role for environmental policy implementation in developing countries (Blackman, Lyon and

4 5

http://sedesu.queretaro.gob.mx www.sat.gob.mx
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Sisto, 2006). The basic idea behind these mechanisms considers the role of government should be changed from being interventionist to playing a more facilitative role, encouraging efforts by the private sector itself (Frijns & Van Vliet, 1999. The significant scale of the accumulated benefits justifies this argument. Under the MGSCP initiative, public institutions obtained impressive results in environmental progress by influencing a significant number of SME. Both leading companies and SMEs gained benefits through the implementation of program projects that brought innovation to their existing productive systems. Furthermore, the voluntary mechanism employed for the program opened opportunities for both public and private institutions to disseminate indicators of environmental quality improvements. Often, regulatory and economic agencies only report indicators related to administrative processes (Espinosa & Rodriguez, 2003; Room, 2005). 7. Conclusions

This research assesses the economic and environmental performance of an innovative program aimed at small and medium-sized enterprises (SMEs) included in supply chains of major manufacturers in Mexico. Known techniques such as costbenefit analysis and linear regression models are used to study relationships between firm and project characteristics, and between economic and environmental outcomes. The studies database includes a large sample of companies in comparison with other quantitative studies involving SMEs (Kusyc & Lozano, 2007). Information contained in the database is chiefly drawn from that made available by the participating companies and the cleaner production or eco-efficiency projects they designed. The database does not possess information concerning the implementation rate of these projects. Unfortunately, this is a key limitation, as several cleaner production and eco-efficiency programs report limited application percentages despite the attractive economic and environmental benefits of the designed alternatives (Stone, 2006a). Complementary research on a small sample of the same program (177 projects) found implementation rates of about 40 percent (Van Hoof, forthcoming). Nonetheless, it is recommended that further research assess the implementation rates of designed projects and their real economic and environmental benefits for the whole database. This research approach concerns the economic and environmental benefits of the Mexican Green Supply Chain Program. Although numerous insights were gleaned concerning program effects on several participating companies, this study does not consider the organizational dynamics that occur within and between companies. Research on the profiles of participants and interaction among them will be required. The database used in this study concerns firms linked to global supply chains. In the context of a developing country such as Mexico, these types of companies are generally classified as more advanced (Battat et al., 1996; 20). Micro enterprises, with less than 10 employees, represent by far the largest category of SMEs in Latin
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America (Zevallos, 2003). Few of these firms deal directly with global supply chains. Nonetheless, they play an important role in the local economic context and represent a significant source of environmental pollution. Reaching out to the regions vast number of microenterprises, and searching for ways to reduce the impact of their operations on the environment remains an important challenge for researchers and practitioners.
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Appendix A Discount model used in the Net Present Value (NPV) calculation Net Present Value (NPV) is a standard financial indicator to analyze the profitability for an investment project. It takes into account time periods and future cash flows. Its procedure involves the initial investment and an estimation of the over-all value of a project at present, summing up the annual incomes of the time period that the project will be in place. Discount rates are used. The general formula to compute NPV indicators is (Banks, 2010): - I0 In which Vt represents the cashflows in periods t. I0 is the initial investment. n is the number of periods considered in the project. k is the discount rate. As main reference to establish the discount rate (CAPM) we use (Villareal, 2010) who proposes a consistent methodology for the calculation of the cost of capital in emerging markets such as Mexico. This method, denominated CAPM, uses the following assumptions: Discount rate = CAPM = Were:

And: interest rate without risk Intermediation spread = margen depending of the country risk of Mexico (BBB) CR = country risk evaluated by Standard & Poors 500 impositive rate of the mexican market = risk premium, derived from the differences on the simple averages of the rates in the market and the spot rate for the zero-coupon bonds of the US treasury. = Beta of leveraged assets, calculated from the average assets of sectors, discounted at the average of the optimum capital structure of the sectors (D/E) and the Mexican tax rate.

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Appendix B

Variables used in the regression analysis and the control variables.

Table B1 Different variables used in the regression analysis with their categories and the control variables.
Variable Categories Packaging Printing Raw material Indirect supplies Services Leading company Large (>250 employees) Medium (250 - 51 employees) Small (50 11) Micro (< 10 employees) Best practice Technology innovation New activity Combined savings Energy efficiency Raw material efficiency Water efficiency Waste valuation Control category Food

Type of supply - firm

Large

Firm size

Project typology 1

Best practice Combined savings

Project typology 2 Source: Author

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Appendix C Sensitivity analysis Table C1 Sensitivity analysis varying the lifetime of the projects identified as best practices from 3 to 5 years
VARIABLES Medium Small Micro Printing Raw material Indirect Supplies Services Technology innovation New Activity Energy Efficiency Water Efficiency Raw Material Efficiency Residual Valuation
Constant

Logarithm of dependent variable NPV Model 1 NPV Model 2 3 years 5 years 3 years 5 years
-0.501*** (0.0920) -1.107*** (0.111) -1.190*** (0.210) -0.362* (0.202) -0.239** (0.120) -0.765*** (0.160) -0.622*** (0.134) 0.466*** (0.0894) 0.474*** (0.174) -0.530*** (0.0918) -1.132*** (0.111) -1.203*** (0.208) -0.327 (0.200) -0.223* (0.120) -0.725*** (0.158) -0.577*** (0.133) 0.0403 (0.0893) 0.0472 (0.174) -0.522*** (0.0917) -1.143*** (0.110) -1.257*** (0.216) -0.237 (0.199) -0.136 (0.118) -0.691*** (0.159) -0.522*** (0.132) -0.557*** (0.0904) -1.170*** (0.109) -1.258*** (0.214) -0.257 (0.193) -0.121 (0.116) -0.657*** (0.156) -0.482*** (0.129)

-0.637*** (0.132) -1.120*** (0.158) -0.380** (0.157) -0.559*** (0.155) 13.84*** (0.156) 2,004 0.104

-0.719*** (0.129) -1.226*** (0.157) -0.373** (0.153) -0.583*** (0.151) 14.17*** (0.154) 2,028 0.112

13.16*** (0.124)

13.57*** (0.123) 2,028 0.080

Observations 2,004 R-squared 0.093 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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