Environmental Engineering Reference
In-Depth Information
FDI and the environment
That FDI will bring cleaner technologies to developing countries, enabling technological
leapfrogging, is a persistent and attractive notion. Numerous cases from around the
world, however, show that FDI does not automatically bring cleaner technologies with it
(Gentry, 1999; Araya, 2002). There are three principal theories to explain this phenome-
non of foreign investors transferring outdated or more pollution-intensive technologies
to the recipient country: the pollution haven hypothesis; the race-to-the-bottom hypoth-
esis; and the stuck-in-the-mud hypothesis. But it is perhaps better to try to understand not
whether FDI is good or bad for the environment, but rather under what conditions it can
be bene
cial (Araya, 2002). As Gentry (1999) notes, FDI is neither 'boon nor bane' for
the environment; it is both.
The pollution haven hypothesis posits that multinational corporations will relocate to
developing countries due to their weaker environmental standards (and therefore lower
compliance costs). As mentioned above, this hypothesis is one regarding
fi
fi
rm location, not
fi
rm has already invested. The empirical evidence for the pol-
lution haven hypothesis is thin (Chudnovsky and Lopez, 2002; Gallagher, K.P., 2004). The
main reason why so little evidence for the pollution haven hypothesis has accumulated
seems to be that environmental compliance costs are relatively insigni
rm performance, once the
fi
fi
cant as compared
with the other potential bene
fi
ts of moving to developing countries, such as substantially
lower labor costs.
The race-to-the-bottom and stuck-in-the-mud hypotheses are connected. The race-to-
the-bottom hypothesis is that countries wishing to attract more FDI will weaken their
environmental standards in order to do so. This weakening could be done through relax-
ing existing standards (though this is rare), or through o
ering reduced non-compliance
fees or exemptions for certain projects. A variation on this theory is the 'stuck-in-the-mud'
or 'regulatory chill' theory, where recipient countries - mainly developing countries - will
not raise environmental standards for fear of losing FDI to other countries (Zarsky,
1999). Here the evidence is more mixed.
Extending the 'regulatory chill' theory, a 'competitive-disadvantage-vicious-circle'
hypothesis has been posited (Gallagher, 2006a), where recipient countries do not raise
environmental standards for fear that domestic industries cannot compete with the
foreign-invested
ff
rms lack the technology to
comply. The developing country delays raising environmental standards for fear of
putting the domestic
fi
rms because the una
liated domestic
fi
rms further inno-
vate to meet ever-more stringent standards abroad. Thus the environmental-technologi-
cal gap continues to widen between domestic
fi
rms out of business, but meanwhile the foreign
fi
rms and their foreign counterparts, putting
further pressure on the recipient government to delay imposition of stricter pollution
policies.
Grossman and Krueger (1991) decomposed the e
fi
ect of trade liberalization in a
manner that is useful for considering the environmental impact of FDI as well: scale,
composition and technique e
ff
ects refers to when the environmental impact
is large because the scale of economic activity is large. Composition e
ff
ects. Scale e
ff
ects refers to
structural changes in the economy resulting in increased or reduced pollution, such as
if heavy, pollution-intensive industry grows as a result of FDI. Technique e
ff
ff
ects refers
to the impact of
technological changes such as introduction of
pollution control
technologies.
