Overall, the multinationals' track record seems clean…

UNESCO Courier, Dec, 1998 by Tom Jones

After tax havens . . . pollution havens? Are multinationals seeking to relocate in countries with low environmental standards? It all depends on how you look at it.

In the search for new sources of capital, labour and raw materials are multinational corporations looking to relocate in "pollution havens" where environmental regulations are lax if not non-existent?

The question is increasingly being asked at a time when the level of foreign direct investment (FDI) is rising sharply. This is mainly due to the fact that both "source" and "host" countries recognize that each have something to gain from the FDI process. However, some observers are afraid that economic gains are being generated at the expense of environmental quality and other important elements of social welfare. They worry that "host" countries will compete for the benefits of new FDI by lowering their environmental standards or by reducing efforts to enforce existing standards, and that firms will relocate to these "pollution havens", to gain a cost advantage over their competitors. In this scenario, developing countries are regarded as the most likely sites of pollution havens because they may be the countries most willing to trade off their environmental quality for economic gains, and industrialized countries are cast in the role of predators willing to degrade the environment of developing countries in order to generate economic gains for themselves. However, most research suggests that, overall, companies do not invest overseas to obtain access to lower environmental costs.

It is difficult to determine whether FDI flows are affected by the level of environmental regulations existing in foreign countries. Foreign capital clearly flows to a wide range of countries, industries and companies - some of which are careful environmental stewards; some of which are not. A firm may in any case invest in a country to take advantage of a high quality labour force and other factors unrelated to environmental costs.

Respect for the environment: a good selling point

Environmental costs are often a relatively small component of total production costs, which may sometimes even be lower when environmental standards are higher (for example, where lower environmental standards lead to higher costs of treating industrial water supplies).

Multinationals often seem more interested in consistent enforcement of environmental rules than in lower standards per se. Moreover, companies are often willing to make new investments that actually improve the environment, so long as their main competitors are also required to do so. Part of the reason for this is that multinationals frequently apply a single environmental standard to their world-wide operations, regardless of any (lower) standards which may exist in a particular country. There could be three main reasons for this.

First, the firm may have calculated that it cannot afford to see the reputation of its products in the (global) market-place tarnished by charges of "environmental exploitation" in one particular location - charges which can sometimes result in boycotts or other forms of consumer pressure. For example, investors in Puerto Rican banana production firms have insisted on "due environmental care" by those firms, because they perceive that overseas markets for their products will demand higher levels of environmental quality.

Second, the firm may have calculated that it is less expensive to apply a single environmental standard to its (globally-integrated) production processes, rather than to develop "tailor-made" production lines, based on varying levels of environmental standards.

Finally, the ability of firms to make "dirty" investments may be limited by requirements in their home country. For example, the US Ex-Im Bank requires any US company taking advantage of its export financing assistance to meet certain minimum environmental criteria.

On the other hand, there is some evidence to suggest that "pollution havens" do exist within certain types of firms, operating in specific industries, and in particular countries. Investments made in the resource extraction and processing sectors, such as chemicals, metallurgy, logging, and pulp and paper, fall into this category. In these industries, pollution control costs can make up a significant proportion of the firm's total costs. The result can be that small cost differences can translate into large changes in market share and profitability. These firms are more susceptible to the level of environmental costs, and therefore more likely to invest in "pollution havens". However, this does not necessarily mean that countries actually lower their environmental standards to attract new investments.

There is clearly competition, both within and between countries, to obtain access to new FDI. It is particularly keen in the rapidly-industrializing countries, and in countries which are dependent on the resource extraction and processing industries in which the potential for hard currency export earnings may be very high. In these situations, incoming investors can often successfully argue for relief from "high" environmental costs.