Environmental Engineering Reference
In-Depth Information
Environmental spillovers
A central promise of FDI is that it will promote not just economic growth but the growth
of more environmentally sustainable industries in developing countries. 'FDI has the
potential to bring social and environmental bene
ts to host economies', advises the
OECD, 'through the dissemination of good practices and technologies within MNEs
(multinational enterprises) and through their subsequent spillovers to domestic enter-
prises.' While it cautions that there is a risk that foreign-owned enterprises may jeopardize
sustainable industrial development by exporting old technologies and 'not-so-good' prac-
tices banned in home countries, the OECD optimistically concludes that 'there is little
empirical evidence to support the risk scenario' (OECD, 2002, p. 5).
FDI potentially delivers three types of environmental spillovers for sustainable indus-
trial development:
fi
Clean technology transfer
: transfer to MNC a
liates of production technolo-
●
gies which are less polluting and more input e
cient than those used by domestic
fi
rms.
Technology leapfrogging
: transfers of state-of-the-art production and pollution-
control technologies by MNCs which allow developing countries to leap to the
global technology frontier.
●
Pollution halo
:di
ff
usion among domestic
fi
rms, including suppliers, of 'best prac-
●
tice' in environmental management.
The existence of environmental spillovers in developing countries rests on four assump-
tions. First, because they are subjected to global competition, MNCs are more techno-
logically dynamic than domestic
ciency
in the use of production inputs, which reduces both pollution and resource intensity.
Second, MNCs transfer their cleanest, state-of-the-art production technologies to
developing countries. They do so because developing-country production sites are inte-
grated into MNC global production and marketing strategies. Competing for global
markets requires companies to maximize e
fi
rms. Technological change tends to promote e
ciency in all production sites.
Third, originating primarily in OECD countries, MNCs are subject to higher environ-
mental standards in their home countries than are domestic
fi
rms in developing countries.
Re
ected in both government regulation and consumer preferences, higher environmen-
tal standards force MNCs to direct R&D funds towards cleaner and safer process tech-
nologies and products. They also nudge MNCs 'beyond compliance' with mandatory
environmental regulation and towards adopting best practice in environmental manage-
ment as a way of demonstrating corporate social responsibility. Increasingly, best prac-
tice includes corporate oversight not only of foreign-based subsidiaries but also of supply
chains.
Fourth, to minimize transaction and reputation costs and liability risks, MNCs operate
with global, company-wide environmental standards. These centralized standards are
based either on those of the MNC home country or on higher internal or international
standards.
3
fl
It is 'standard operating procedure' for MNCs to di
ff
use these standards to
foreign a
liates and monitor performance.
Where these assumptions hold, it is reasonable to expect that FDI will generate sus-
tainable development spillovers. However, they may not hold for all or even most MNCs.
