Can Foreign Direct Investment Facilitate Green Transition? Beata Javorcik
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Can Foreign Direct Investment Facilitate
Green Transition?
Beata Javorcik
Motivation
FDI is widely perceived as a source of growth and development
• Foreign acquisitions lead to more sales, higher TFP and more
innovation (Arnold & Javorcik JIE 2009; Guadalupe et al. AER
2012)
• FDI inflows associated with productivity spillovers, particularly
to supplying industries (Javorcik AER 2004)
But what about its impact on natural environment?
Good for the Environment, Good for
Business:
A. Brucal, B. Javorcik & I. Love
Journal of International Economic (forthcoming)
Foreign Acquisitions and Energy Intensity
Why do we expect foreign-owned
firms be more energy efficient?
• Larger scale of production => more worthwhile to incur
the cost of energy saving investment
• Access to better technologies
• Reputational reasons
• Requirements of export markets
• Better management
Foreign firms tend to be better managed
5Source: Enterprise surveys and authors’ calculations.
Foreign-owned firms have best management practices
Scoring is based in Enterprise Survey questions on management practices capture a firm’s core business
practices relating to operations, monitoring, targets and incentives
Data
• Indonesian Census of Manufacturing, 1983-2001
• Includes manufacturing plants with 20 or more
employees
• Detailed information on energy inputs, both in terms of
expenditure and physical units
‒ gasoline, diesel, diesel oil, kerosene, lubricant, bunker oil, coal,
coke, public gas, liquified petroleum gas (LPG), firewood, and
charcoal
• More than 300,000 plant-year observations for more
than 40,000 plants
• Foreign acquisition defined as the change in foreign
equity share to over 20%
Empirical strategy
• Within-plant output and energy use changes
• Using Propensity Score Matching to create the missing
counterfactual
• Matching within year-industry (4-digit) groups
• Differences-in-differences on matched pairs
Balancing test
Balancing test
Average Energy Expenditure/Output
Average Energy Use (MBTUs)/Output
Average CO2 Emissions / Output
Magnitudes
Message 1: Foreign acquisitions lead to
greater energy efficiency
What are the channels?
Scale effect (Output)
Newer technologies
(Investment in machinery)
Changes to the production process
Plants with
next to no
change in
the product
mix
Results
hold when
controlling
for output
Changes to the energy mix
19
Message 2: The impact of FDI is
sensitive to energy prices
What are the aggregate effects?
What are the aggregate effects?
Reallocation effects of FDI
Message 3: FDI inflows are associated
with improvements in industry-level
energy efficiency
What happens when foreign owners
leave?
• Less pressure from HQs and export markets
• Loss of foreign managers
• Different priorities
Divestments reverse gains
Divestment => Lower output
s Divestment year One year later Two years later
ln(Output)
Divestment -0.345*** -0.421*** -0.537***
(0.101) (0.126) (0.131)
Observations 328 328 328
R-squared 0.033 0.032 0.047
Source: Javorcik & Poelhekke (JEEA, 2017)
Divestment => Lower productivity
e Divestment year One year later Two years later
ln(TFP)
Divestment -0.038*** -0.043*** -0.038***
(0.007) (0.007) (0.008)
Observations 314 314 314
R-squared 0.090 0.095 0.065
Source: Javorcik & Poelhekke (JEEA, 2017)
Divestment => Lower export and
import intensity
Source: Javorcik & Poelhekke (JEEA, 2017)
Message 4: Divestments reverse
the efficiency gains
WHAT HOLDS BACK GREEN
INVESTMENTS AT LOCAL FIRMS?
31
Differences across firms in green management practices
32Source: EBRD-EIB-WBG Enterprise Surveys and authors’ calculations. SMEs have fewer than 100 employees; young firms are less than five years
old.
Customer pressure crucial for green
investments
33
Examples of pure green investments: Green energy generation on site, energy management, waste
minimisation, recycling and waste management, pollution control measures, water
Customer pressure crucial for green
investments
34Source: EBRD-EIB-WBG Enterprise Surveys and authors’ calculations.
Examples of pure green investments: Green energy generation on site, energy management, waste
minimisation, recycling and waste management, pollution control measures, water
Green investments not viewed as a
priority
35Source: EBRD-EIB-WBG Enterprise Surveys and authors’ calculations.
Reasons for not adopting energy efficiency measures vary
Message 5: Firms need to be nudged to
undertake green investments
IS THERE A ROLE FOR INDUSTRIAL
POLICY?
37
What is investment promotion?
Image building
Investment generation
Investor servicing
Policy advocacy
Incentives
Investment Promotion Agency’s
role in investor’s decision process
Long list (10 countries)
➢ IPA’s image building campaign
➢ IPA contacts potential investors
Short list (3-5 countries)
➢ IPA provides information on potential sites, taxes, wages, labor and supplier availability, registration procedures, etc
Country visits
➢ IPA organizes site visits, provides additional information, helps find JV partners
Decision
➢Serving as an intermediary between the investor and the gov’t
Investment
➢Helping a committed investor with the required procedures
Sector targeting: best practice in investment promotion
No. of countries targeting in 2004
0
5
10
15
20
25
30
35
40
45
50
Info
rmation
Oth
er
industr
ies
Food
Machin
ery
Ele
ctr
ical equip
ment
Fin
ancia
l in
stitu
tions e
x.
Dep.
Inst.
Depository
institu
tions
Pro
fessio
nal and s
ci. s
erv
.
Chem
icals
and a
llied p
roducts
Prim
ary
fabricate
d m
eta
ls
Petr
ole
um
and m
inera
ls
Tra
nsport
equip
ment
Utilit
ies
Whole
sale
tra
de
Developed countries
Developing countries
Data
Investment promotion (2005 IPA Census)
• sectoral targeting
• 56 countries with complete information on the timing
FDI flows:
• US Bureau of Economic Analysis
• 1990-2004
• 132 countries
• 13 sectors
• unbalanced panel
Investment promotion works!
• Targeting increases FDI inflows by 155% in developing
countries (Harding and Javorcik, EJ 2011)
• Is it a lot?
‒ 155% increase => additional $17 mn dollars of FDI
‒ In the sample of developing countries that received US FDI, the
median sector-level inflow was $11mn
• Investment promotion is more effective in countries where
information asymmetries are likely to be large and in countries
with burdensome bureaucratic procedures
Investment promotion can
shape comparative advantage
43Source: Harding, Javorcik & Maggioni (2019)
Investment promotion can
help upgrade export quality
44Source: Harding & Javorcik (REStat, 2012)
Dependent variable = ln(Unit value of exports)
Conclusions
FDI can facilitate green transition
• Foreign acquisitions lead to greater energy efficiency
• Foreign divestments reverse the gains
• Effects visible at the industry level
Firms in developing countries unlikely to undertake green
investments without a nudge
Investment promotion can be used to shape the structure
of the economy
THANK YOU!
46
Inflows of foreign direct investment have been trending down
Source: IMF, UNCTAD and authors’ calculations
Foreign direct investment
(Net Inflows, per cent of GDP)
47
FDI to developing economies now exceed FDI to advanced
economies as % of GDP
Source: UNCTAD and authors’ calculations
Foreign direct investment
(Net Inflows, per cent of GDP)
48
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