Dirty Foreign Direct Investment? Chinese Outward FDI and Pollution Pathologies

In the 1970s, Tokyo adopted a conscious strategy to encourage outward foreign direct investment (OFDI) by Japanese firms as a way to mitigate the poisonous pollution flowing from Japan’s economic miracle. This OFDI imposed considerable negative environmental externalities on Southeast Asia and China where Japanese companies shifted their operations. In a provocative piece in the Financial Times earlier this month, Professor Kelly Sims Gallagher (Tufts University) suggested, though she is not the first, that the Chinese OFDI (COFDI) associated with China’s Belt and Road Initiative (BRI) may, de facto, have similar environmental downsides. These negative effects tie to COFDI’s focus on non-green (e.g., fossil fuels versus solar and wind) energy projects, its massive role in “dirty” power sector infrastructure projects (i.e., coal-fired power plants), and low environmental standards. All of this together will “lock in outdated, dirty, and inefficient technologies in recipient countries.” These corporate pathologies are not likely to go away given they are associated with Chinese state-owned enterprises (SOEs) as well as the dearth of market and non-market mechanisms to moderate their poor environmental practices. Gallagher proposes Beijing step up to rein in bad environmental practices by SOEs and other Chinese firms. Host countries, though, also need to become choosier about the COFDI that they welcome, demand greener investments and operations, and ask for plant and technology that result in smaller environmental footprints. Unfortunately, there likely will be no purely green world when policymakers in Southeast Asia, Africa, and Latin America prioritize economic development, industrialization, and infrastructure. While COFDI may not be ideal from an environmental standpoint it may be the better than local options. Positively, if the environmental Kuznet’s Curve is correct and there is meaningful government regulation, the wealth flowing from the development facilitated by COFDI may, over the long term, lead to a greener world.