The Unassuming Economist

From a VoxEU post by Arlan Brucal, Beata Javorcik, and Inessa Love:

“The link between foreign ownership and environmental performance remains a controversial issue. Data from the Indonesian manufacturing census show that plants undergoing foreign acquisitions reduce their energy intensity by about 30% two years after acquisition by multinationals. This column argues that foreign direct investment can serve as a channel for the international transfer of environmentally friendly technologies and practices, thus directly contributing not only to economic growth but also to environmental progress.

According to the 2018 report of the UN Intergovernmental Panel on Climate Change (IPCC), exceeding the global threshold of 1.5°C above the pre-industrial temperature level will mean increased risk of extreme drought, wildfires, floods, and food shortages for hundreds of millions of people. Keeping emissions below the crucial threshold would require widespread changes in energy, industry, buildings, transportation, and cities. Can multinationals be part of the solution? Can flows of foreign direct investment (FDI) help put a brake on emissions? Or would they exacerbate the already worsening global climate condition?

Environmentalists argue that highly polluting multinationals relocate to countries with weaker environmental standards to circumvent costly regulations in their home country (Hanna 2010, Millimet and Roy 2015, Cai et al. 2016). In this way, they increase pollution levels not only in host countries but also globally.

In contrast, supporters of globalisation point out that FDI has a positive effect on the natural environment because multinationals tend to use more efficient and cleaner technologies than their domestic counterparts. With the spectacular growth in FDI flows and the increasing importance of developing nations as host countries, the potential effect of FDI on the natural environment remains controversial (Kellenberg 2009, Cole et al. 2017).

In a forthcoming paper (Brucal et al. 2019), we contribute to this discussion by examining the impact of foreign acquisitions on energy consumption and CO₂ emissions of acquired plants. The study is based on plant-level data from the Indonesian Manufacturing Census, covering the period 1983-2001. The data contains detailed information on plant-level use of various energy inputs (both in value and physical units) and thus can be used to calculate the expected CO₂ emissions using standard conversion factors specific to each type of energy. We then compare the changes in these variables in the acquired plants and a carefully selected group of domestic plants that had not changed ownership.¹

Why would we expect acquired plants to improve energy efficiency?

There are several reasons why foreign acquisitions may improve energy efficiency. First, foreign acquisitions tend to increase production volume by boosting productivity and facilitating access to foreign markets through the foreign parent’s distribution network (Arnold and Javorcik 2009). This makes investments in improving energy efficiency more worthwhile as the sales base becomes large enough to cover the fixed cost of investment.”

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