SME management practices and
global value chain (GVC) entry and exit 

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BRIEFING NOTE

Small and medium enterprises in and out of GVCs: Relation to Environmental Management Practices

 

Source:

Ranasinghe, U.C., Ennis, S.F., Monteiro, J. and Malagueño, R. (2025) "Global value chains, trade facilitation and the use of environmental management practices in SMEs", International Journal of Operations & Production Management, https://doi.org/10.1108/IJOPM-03-2024-0261

 

Executive Summary:

 

This study examines how the participation of small and medium-sized enterprises (SMEs) in global value chains (GVCs) influences their adoption of environmental management practices. It highlights that entry into these chains tends to encourage sustainable practices as firms maintain their environmental option value, while exit often leads to their abandonment. The article also explores the crucial role of trade facilitation at the national level, demonstrating that low or high levels of facilitation can paradoxically incentivize exiting SMEs to maintain their environmental efforts. Ultimately, this research highlights the importance of trade policies for SME sustainability, even in the face of changes in globalization.

 

Long Abstract:

Purpose

This study investigates the relationship between small and medium-sized enterprises' (SMEs) participation in global value chains (GVCs) and the use of environmental management practices. The study examines the role of national governments in shaping this relationship, specifically exploring the role of trade facilitation. The emphasis lies on understanding the extent to which GVCs and governmental policy interaction relate to improved environmental management practices among SMEs.

Design/methodology/approach

The study builds on several publicly available data sources, including the World Bank’s Archival Enterprise Surveys and the Organisation for Economic Cooperation and Development Trade Facilitation Indicator. The sample includes 1,462 SMEs in 18 countries. To test our hypotheses, we use regression analysis employing bootstrapping techniques for rigorous testing of direct and indirect associations.

Findings

Results indicate that SMEs tend to use environmental management practices when entering GVCs but not after exiting. Moreover, the study suggests that a non-linear feature of trade facilitation plays an important role in mitigating the relationship between SMEs exit from GVCs and SMEs abandonment of environmental management practices.

Originality/value

The relationship between SMEs entering and exiting GVCs and environmental management practices is not well understood. It is still unclear whether the external pressures and governmental policies to stimulate trade contribute to improving the sustainability behaviour of SMEs. This study adds to the operations management literature by relating government policies with the use of environmental management practices, providing insights on the relationship between deglobalisation and SMEs sustainability activities. It introduces the management concept of environmental option valuefor firms to maintain capabilities that help them integrate production chains with environmental management practices.

 

 

Keywords:

SMEs and Global Value Chains

Environmental practices

Environmental Option Value in management strategy

Trade facilitation

Exit from Global Value Chains

Option value

SMEs, GVCs and Environmental Practices

Management Practices in SMEs

 

Link between Participation in GVCs and Environmental Management Practices (SMEs):

 

The study confirms a positive relationship between SME entry into GVCs and the adoption of environmental management practices. The authors rely on the "pollution halo" hypothesis, which suggests that large GVC firms transfer greener technologies to their partners. 

 

This adoption is driven by the need to comply with GVC standards to enter and remain in them, as well as the perceived "option value" of these practices in establishing sustainable business relationships. 

 

Impact of GVC Exit on Environmental Practices of SMEs:

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Unlike entry, the study reveals a significant negative relationship between SMEs' exit from GVCs and the retention of their environmental management practices.

 

The authors explain this by increased resource constraints and uncertainty associated with exit, which may lead SMEs to view environmental investments as a lower priority. The "option value" of these practices is perceived as low in the absence of GVC pressures and opportunities. 

​

Role of Trade Facilitation at National Level:

 

The study finds a non-linear (U-shaped) moderating effect of trade facilitation on the relationship between GVC exit and the use of environmental practices by SMEs.

 

In countries with low levels of trade facilitation , SMEs that exit GVCs may paradoxically maintain their environmental practices as an "institutional bridge" to offset constraints and signal their reliability to future international partners, thus retaining a high "option value" for potential re-entry. 

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In countries with medium levels of trade facilitation , the immediate pressures of a highly constrained trade environment lessen, and SMEs would perceive a decrease in the strategic value "of maintaining environmental practices as a hedge against future uncertainties [...]. "

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In countries with high levels of trade facilitation , simplified procedures, reduced transaction costs, and improved access to information enhance the "option value" of maintaining environmental practices for exiting SMEs, as they anticipate better chances of future contracts and recognize the operational benefits of these practices.

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Implications for De-globalization and Sustainability:

◦

The study suggests that reshoring trends and the reduction of multinationals' production footprints could have negative environmental consequences by leading to an increased exit of SMEs from GVCs and a shift away from sustainable practices. 

 

Methodology:

The study uses a quantitative approach based on secondary data from the World Bank Enterprise Survey (WBES) and the OECD Trade Facilitation Index. The sample includes 1,462 SMEs in 18 countries. Regression analyses, including bootstrapping techniques and Hayes moderation models, were used to test the hypotheses. Robustness tests, including distinguishing between direct and indirect engagement in GVCs and using instrumental variables (2SLS) to mitigate endogeneity concerns, were also conducted.

 

Theoretical Contributions:

 

Contribution to the literature on the adoption and abandonment of environmental management practices by SMEs in the context of GVCs. This study is one of the first to explicitly examine the link between GVC exit and these practices.

 

Extension of the literature on the role of the national institutional context, particularly trade facilitation, in shaping firms' environmental practices. The introduction of the concept of "environmental option value" and the demonstration of the U-shaped moderating effect of trade facilitation constitute important theoretical contributions.

 

Practical Contributions:

 

Highlights the importance for SME managers to adopt environmental management practices to operate effectively in GVCs.

 

Provides policymakers with guidance on how trade facilitation policies can encourage more sustainable behavior among SMEs, even outside GVCs. The implementation of comprehensive trade facilitation policies is crucial.

 

Limitations and Future Research:

 

The use of cross-sectional data limits the analysis of temporal relationships. Future research could use panel data.

 

The study takes a broad approach to environmental practices. Future research could focus on specific practices.

 

Trade facilitation is measured at the national level, not capturing regional and local variations.

 

Operationalization of GVC entry and exit through export and import activities is limited.

 

The lack of information on the origin/destination of imported/exported goods makes it difficult to isolate the effect of environmental regulations of trading partners.

 

The integration of qualitative methods could enrich the understanding of the phenomenon.

 

Conclusion:

 

This study provides important insights into the complex relationship between SMEs' participation in GVCs, their environmental management practices, and the moderating role of trade facilitation. The findings highlight that while entry into GVCs tends to encourage the adoption of sustainable practices, exit may lead to their abandonment, unless the domestic trade facilitation context is characterized by low or high levels. These findings have significant theoretical and practical implications for businesses, policymakers, and understanding sustainability issues in a changing global economic context.

 

Quotes

 

* "Results indicate that SMEs tend to use environmental management practices when entering GVCs..."

 

* "For a company to secure entry to and remain in a GVC, adherence to the established standards within these arrangements is imperative." 

 

* "Given that the use of environmental management practices offers mutual benefits, such as financial gains for buyer firms and improved relationships with supplier firms [...], SMEs can perceive high value in using these practices upon entry into and while in GVCs."

 

* "The relationship between SMEs exiting GVC and the use of environmental management practices is moderated by trade facilitation at the national level, such that it becomes a U-shaped relationship."

 

* "In countries with low levels of trade facilitation, SMEs must decide whether to retain or abandon environmental management practices upon exiting GVCs, given the uncertainties such exits bring. We propose that SMEs could, surprisingly, choose to maintain environmental management practices, building on the concept of environmental option value [...]. Retaining these practices serves as a hedge against future uncertainties, particularly the potential for re-engagement with global value chains."

 

 * "Consequently, SMEs located in countries with high levels of trade facilitation perceive increased value for their operations from using environmental management practices [...]. By enhancing market connectivity and reducing transaction costs, trade facilitation creates an environment conducive to SMEs increasing the option value of using environmental management practices, even upon exiting GVCs."

 

. * "Results indicate that SMEs tend to use environmental management practices when entering GVCs, but the majority of them do not retain these practices upon GVC exit."

 

* "Our work highlights the unintended environmental consequences of these changes, indicating that the withdrawal of multinational enterprises from broad value chains will likely be associated with a reduction in the use of sustainable production processes by SMEs that are no longer involved in GVCs."

 

* "Since exiting GVCs introduces uncertainties regarding market access, as well as revenue and resources, SMEs may find it challenging to justify investments in environmental management practices." 

 

* "Therefore, SMEs may view the option value of using environmental management practices post-GVC exit as low."

 

 

Paper Summary Initial Draft By NotebookLM