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