Foreign direct investment and pollution transfers in transition economics in Southeast Aisia

Introduction All production leads to some degree of pollution. Imports cause pollution in the exporting country as a result of production. The importer gets the benefits of consumption and the producing country has to deal with the negative external effects in terms of environmental damage. In a world where ever increasing amounts of trade are a reality, it is likely that many of the products we consume are not produced in our own country, but are produced abroad. As we consume many products from abroad, the pollution associated with the production of these products is inflicted on the country of origin. This is the essence of the issue at hand. In consuming foreign products, pollution is effectively transferred to that foreign country. However, transfers of pollution are not only directly caused by international trade, but are under the influence of international capital flows as well. A main implication of foreign investments in a host economy, is that it stimulates and expands production. As production demands energy and various resources in order to realize a final product, it seems fair to assume that international investments are partly responsible for transfers of pollution. For instance, if a factory moves from one country to another, so does its demand for energy and its pressure on the environment in terms of pollution. This paper tries to link these pollution transfers to foreign direct investments. In doing so, we consider stocks of foreign direct investment and perform an import-export analysis of five transition economies in East and Southeast Asia. Considering the economic state they are in, many Southeast Asian economies depend on exports for income. Not nearly all produced goods are consumed domestically; a substantial amount is traded with other nations. The paper focuses on trade in physical products, assuming they generally cause more strain on the environment than the service sector, for example through direct air and land pollution and indirectly through a more energy intensive production. However, there isn’t a compensation for this embodied pollution, although one could argue that the reward consists of economic growth. The analysis on trade has revealed the degree of competitiveness in different sectors of production for each of the countries. The most important sectors in this paper include chemicals, petroleum, textile and food. The degree of competitiveness, measured by the ratio of imports to exports, tells something about the importance of the Asian developing nations to the outside world and vice versa. In order to approach the coherence of investments and exports embodying pollution, we make use of data on total foreign direct investment stocks and trade data on various relevant industries, and try to connect the two. Although by analysing total investment stocks rather than those in individual sectors and from different countries origin we cannot in detail approach the issue, but we can present a general image of possible pollution transfers while controlling the degree of complexity. Ultimately, we aim to present an answer to the following question: What are the effects of foreign direct investment on pollution transfers through trade in Southeast Asian transition economies? The outline of this paper is as follows. In the first chapter, we explain some of the theories and concepts relevant to this writing. Also, a general description of the role of institutions is included. This is important because of the leading role in directing the economy using policy that can alter investment, consumption, production and coherent pollution. In the second chapter, we will analyse the theory of the environmental Kuznets curve, describing an initial increase of pollution with increasing wealth before decreasing. We apply the theory to developing Asian nations and include comments and implications. The third chapter deals with the creation of national income in the primary, secondary and tertiary sector, the foreign investment stock and their influence on the state of the environment. In particular, we look at foreign investment stocks in relation to four strong subsectors of national industry; chemicals, petroleum, textile and food. The fourth chapter 3 is meant to describe the direction of trade of these four industrial sectors. Identifying dominant trading partners and environmental implications are part of the analysis. We finish with a conclusion.