*{OECD CONFERENCE on FOREIGN DIRECT INVESTMENT & ENVIRONMENT
The Hague, 28-29 January 1999

BIAC DISCUSSION PAPER

I. Introduction}

Trade and investment liberalisation, market-oriented reforms, and privatisation have combined to create a period of sustained economic growth in many countries. The resulting expansion in international economic activity has created global markets in capital and investment products, world-wide manufacturing and customer bases, and brought a broad array of new products and services. Globalisation, with its increased economic interactions, serves to reinforce and consolidate the political, market and economic reforms already well under way. A successful policy for sustainable development aims to make environmental protection and economic growth and integration mutually supportive.

Moreover, globalisation, accompanied by open trade and investment, provides the conditions not just for improved economic prosperity but also for environmental protection. An overwhelming part of the research on environmental effects of foreign direct investment (FDI) shows that: 1) the environmental effects of foreign direct investment are largely positive and 2) foreign investors contribute significantly to ensuring that the positive effects are realised.*{1 } FDI flows are increasingly important in providing the resources and capacity necessary to address environmental and infrastructure challenges, particularly in non-OECD countries.*{2}

*{1 See for example: Open Markets Matter: The Benefits of Trade and Investment Liberalisation, OECD 1998, p. 96.
2 “FDI is an increasingly important ‘engine’ for sustainable development in many countries.” Foreign Direct Investment and the Environment: An Overview of the Literature, OECD December 1997, p. 9.}

Indeed, the development impact of FDI is not only its monetary value but also its positive side effect on production, including:
*{•} the transfer of modern environmentally-friendly technology and know how,
*{•} the spread of efficient management practices.
Foreign investors more often meet the environmental standards of the countries in which they operate than domestic companies do. Many investors have introduced state of the art
environmental technologies and management practices in their host country production facilities. Increased international investment flows result in increases in the rate at which environmentally sound technologies are introduced into markets world-wide.

*partie=titre II. FDI Improves environmental performance in host countries *partie=nil

Foreign investors, particularly global companies, generally standardise technologies and management systems across countries in which their facilities are located. When they maintain a single standard for environmental practices, they nevertheless must meet legal requirements in the most stringent jurisdiction; therefore their single standard is set at a high level, and carried as a practice to the less strict countries.

As foreign investors, they are often subject to greater scrutiny than local industries. For this reason, they are important potential partners for those who wish to give real effect to
environmental standards. They tend to prefer a transparent, consistent, and predictable environmental policy over a weak policy.

The arrival of foreign investors can also have a beneficial impact on the environmental operations of domestic companies. Local firms try to match the product characteristics and quality standards of foreign-owned operations, and suppliers working to cater to foreign operations will increase process and product quality to meet high standards. Also, employees that move from foreign owned to local facilities bring with them the training and expertise gained in high quality, well managed operations.

Currently, the privatisation of state-owned enterprises is a major cause of foreign direct investment entering some OECD and most non-OECD countries. Privatised companies generally install management teams that focus on reducing costs, increasing employee productivity, and improving the efficiency of the facility. The accompanying new investment frequently brings better technologies which reduce the amount of waste generated and lower the pollution levels of the facility.

*partie=titre III. Open investment policies are fully compatible with high environmental standards *partie=nil

In most cases the driving forces behind an investor’s decision to direct FDI to a particular country are market opportunities, local and regional, and the availability of raw materials or other major production factors. Because environmental costs are a small part of the total costs of establishing production facilities, they are not decisive criterion for foreign direct investors, in contradiction to the common notion of “environmental dumping”.

Recent market and investment liberalisation has provided many examples of how open investment and improved environmental performance can work in tandem. In Mexico, in a period during which the FDI increased subject to the investment rules of NAFTA, the environmental regulatory system has continued to expand and enforcement activities have increased. An ongoing study by Charles Oman of the OECD’s Development Centre (October 1998 draft) finds that the evidence “provides scant support for the race to the bottom hypothesis”. Governments that attempt to attract companies with low environmental standards have not proven successful. Instead, the study suggests that foreign investors do not cause downward pressure on environmental standards, but instead cause standards to rise.

At worst, the study indicates that it is a governments’ fear of not attracting new foreign investment that may somewhat limit upward pressures on local environmental standards. Given that policy choices must balance environmental with social, political and economic goods (such as justice, education, non-discrimination, incentives for work and wealth creation), the limits on upward pressures may be essential to a process of democratically setting the right balance for environmental policy.

*partie=titre IV. Sound regulatory policies help promote both FDI and environmental protection *partie=nil

FDI has already made a considerable contribution to sustaining economic growth and achieving environmental improvement in developing countries. Market factors are the primary determinants of investment decisions but the investment climate is also a major factor. Specifically, investors seek long-term stability of rules and procedures, guarantees for entry and establishment, equal competitive opportunities and protection of existing investment.

Liberal rules for FDI and the attraction of FDI are a necessary precondition for environmental improvement. Appropriate incentives to encourage private investment are:
*{•} stable economic, financial and tax systems;
*{•} a transparent legal structure, with sound rules about foreign ownership, and reliable protection of confidential information and property;
*{•} free capital flows and stable rules for foreign currency exchange;
*{•} a stable regulatory framework fostering innovation in a cost-effective manner, implemented by well-functioning administrative structures (with few bureaucratic rules and delays);
*{•} sound environmental laws and standards, based on scientific assessment, and (again)
permitting innovation;
*{•} a long-term commitment and dedication of resources by all partners; and
*{•} regular and open communication between government and industry.

*partie=titre V. Governmental efforts to attract FDI also helps local citizens *partie=nil

Aside from the benefits that new investment brings--cash to the local economy, job creation (often of high quality), and improvements in protection of the environment--there is also a benefit that arises from the effort of government to attract foreign investors: better government, subject to competitive pressures. Competition between governments to attract foreign investment results in:
*{•} better planning to regulate efficiently (to reach the same policy goals with lower compliance costs), and
*{•} better planning to run government efficiently (to reach the same policy goals with lowest possible taxes).
This discipline can reduce waste and inefficiency caused by misapplied or poorly designed regulation, helping to promote wealth-creation in the economy while still promoting environmental protection.

*partie=titre VI. International Frameworks for FDI and Environment are Mutually Supportive *partie=nil

International rules for environmental protection have been developed in MEAs between some countries (e.g. on climate change, bio-diversity, trans-boundary movements of hazardous waste). In some other cases, MEAs will not be developed because the appropriate environmental standards should be set on a local, national or bilateral basis.

Meanwhile, efforts to develop a Multilateral Agreement on Investment (to promote cross border investment), have been obstructed by groups asserting that a multilateral investment agreement should include precise environmental standards. Business continues to believe that a multilateral investment framework is not the appropriate vehicle for setting precise environmental standards. MEAs are more effective: they can include graduation for developing countries, adjustments for unforeseen improvements to technologies, dispute settlement procedures and other specific features to make them better at addressing environmental protection.

Business supports international rules for investment as well as for environmental protection. Business agrees that clauses in international investment agreements should prevent negative effects on local or national environmental standards (for example, the “not lowering standards to attract an investment” clause as discussed for the MAI). On the other hand, governments should prevent multilateral environmental agreements being used to restrict foreign direct investment on the basis of environmental considerations.

Multilateral investment rules can help countries attract FDI and other economic activity (including lending), and avoid distortions which might inhibit economic development — a vehicle for improving environmental protection.

*{VII. Conclusion}

Economic development itself has proven to be a vehicle for real improvements in the environment, and foreign investment the means by which cleaner technologies and better environmental practices are introduced in countries where they are most needed. Globalisation, accompanied by open trade and investment, provides the conditions for improved economic prosperity as well as environmental protection. Business continues to be an important and engaged actor in the pursuit of sustainable development, and in partnership with others, can make its contribution most effectively in the framework of economic growth, more open trade and investment and a conducive regulatory framework.