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Timing of regulatory stick and supportive carrot may keep businesses focused

February 9, 2018

Coordinating the stick of regulation with the carrot of technical assistance may help small companies perform better environmentally and economically, according to a team of researchers. 

The researchers found in a study that when punitive measures from regulatory agencies were followed by help from business support organizations, companies were more likely to stick to voluntary improvement projects than when these projects were followed by punitive regulatory actions, said Suvrat S. Dhanorkar, assistant professor of supply change and information systems in the Penn State Smeal College of Business.

Suvrat Dhanorkar
Suvrat Dhanorkar is an assistant professor of supply chain and information systems.

He added that increasing coordination between regulatory agencies, for example, the Pennsylvania Department of Environmental Protection, and business support organizations, such as the Pennsylvania Technical Assistance Program — PennTAP — in Pennsylvania and Minnesota Technical Assistance Program — MTAP — in Minnesota, could help small and mid-sized businesses not only stay compliant, but continue to grow. 

"Often experts who are making recommendations for these business support organizations will say that once they meet with a business owner and discuss improvements — making the factory more energy efficient, for example — they'll make good initial progress," said Dhanorkar. "But, somewhere down the line, they get sidetracked — and one of these major events that can sidetrack them is a punitive action from a regulatory agency, which might or might not be related to the improvement that they've undertaken." 

According to the researchers, who report their findings in a recent issue of Management Science, business support organizations offer recommendations and programs, including energy audits and pollution prevention education, on how to improve efficiency and increase environmental compliance. Regulatory agencies usually force mandatory changes through fines and inspections. 

"These are not big companies, so they're not the Microsofts or GEs, and don't have a lot of resources, so they are in dire need of these business support programs and this type of expertise," said Dhanorkar, who also worked with Enno Siemsen, Procter & Gamble Bascom Professor of Business, University of Wisconsin, and Kevin Linderman, Curtis L. Carlson Professor in Supply Chain and Operations, University of Minnesota. 

The researchers suggest that the shock of intervention from the regulatory agency can halt much of a small or mid-sized companies' voluntary efforts to make needed economic and environmental improvements. Dhanorkar added that follow-up regulatory action could halt progress on recommended improvement projects even though the regulatory sanctions are unrelated to the supportive actions. 

"For example, a regulatory agency may issue punitive damages against a company's water use, but the supportive agency is trying to help the company save on electricity," he said. 

According to Dhanorkar, the effect may work best when there is a clear delineation between the regulatory and supportive agencies. 

"In other words, it may send a mixed message if you have one person giving a business both a fine and advice to help a business," he added. 

The researchers add this model could be applied to other areas where businesses, support organizations, and regulatory agencies interact, such as in consumer protection and food and safety areas, said Dhanorkar. 

"There might be benefits to both of these approaches — regulation and support — coexisting," said Dhanorkar. "In fact, some agencies, like the Consumer Product Safety Commission and the Food and Drug Administration, might or might not have both shades of regulation and support. However, based on our findings and some of our discussions with these agencies, what we realized is it's important to keep both of those functions separate. If the same person is coming in and giving both a sanction and a recommendation, managers might get confused." 

The researchers analyzed 1,200 environmental improvement recommendations made by experts from MTAP to help state businesses from 2000 to 2012. The data included details on the improvement, the implementation timeline, and information on the facility. In addition, the researchers used inspection and sanction data from the Minnesota Pollution Control Agency since 1999. 

After matching the data sets, the researchers had information on 1,089 environmental improvement projects taken at 248 facilities. A total of 77 percent were manufacturing facilities, 12 percent were healthcare organizations, and 11 percent were retail businesses. 

According to Dhanorkar, future research could look at the complementary effects between punitive and supportive tactics and how policy approaches, such as self-regulation and information disclosure, could be coordinated.

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