Environmental Pollution issues caused by foreign direct investment
Environment Pollution Issues Caused by Foreign Direct Investment
Table of Contents
TOC o “1-3” h z u Abstract PAGEREF _Toc418481457 h 3Environment Pollution issues caused by foreign direct investment PAGEREF _Toc418481458 h 4Introduction PAGEREF _Toc418481459 h 4Case Study one: China PAGEREF _Toc418481460 h 8FDI patterns in China PAGEREF _Toc418481461 h 10China’s Regulatory Framework for Foreign Direct Investments PAGEREF _Toc418481462 h 11FDI policies and their recent developments PAGEREF _Toc418481463 h 13Environmental management system PAGEREF _Toc418481464 h 15Case study two: Unilever Company PAGEREF _Toc418481465 h 21Case study three: Africa PAGEREF _Toc418481466 h 33FDIs and the environmental impact in Africa PAGEREF _Toc418481467 h 33Conclusion PAGEREF _Toc418481468 h 36
AbstractWith global warming and global environment conservation efforts having hit a higher gear in the recent past, the role of foreign direct investments in developing countries has been brought to the limelight. Foreign direct investments (FDIs) have been accused of major pollution activities in developing countries. Environmentalists have identified that foreign direct investments shift their production to the developing countries due to lenient environmental protection laws and regulations (Liang, 2008). The term ‘pollution havens’ has coined as a consequence of this trend. While environmentalists continue to accuse FDIS of increased pollution activities in developing countries, studies have suggested that the opposite might be the case and that the FDIs may actually be contributing to positive impacts on the host environments. This paper will examine pollution in developing countries and the role of FDIs in the issue. Regulatory frameworks in the developing countries will also be examined and specific measures taken by the developing countries to address the issue of environmental degradation will aldo be discussed.
Environment Pollution issues caused by foreign direct investmentIntroductionEnvironmental pollution and environmental sustainability have been at the forefront of global issues as countries seek to put in place stringent measures on industries in an effort to curb increasing pollution and emission of greenhouse gasses. Global warming directly threatens the future of the world and the need to take measures to protect the deterioration of the environment has since been agreed upon. In developed countries, policy measures have been put in place and strictly implemented to curb industrial emissions. As multinational companies suffer in developed countries in terms of production of the pollution-intensive products, shifting their production to developing countries has been the favorable option. The developing countries have lenient policies as they seek to attract foreign investment. Compromising environmental health for economic growth is the chief reason attracting the multinational companies to such countries as they seek to maintain their production and global edge over their competitors (Gray & Shadbegian, 2002). The role of the multinationals and foreign direct investment in environment pollution will be the main focus of this paper. Foreign Direct Investment (FDI) is primarily defined as the investment done by foreign companies in overseas joint ventures or subsidiaries. Multinational companies represent the biggest part of foreign direct investment, and the term FDI will be used synonymously with multinational companies throughout this paper.
International summits and conferences on greenhouse emission and the development of policies to safeguard the planet against the threat of global warming have hit media headlines in the recent past. The agendas behind these summits is to seek ways to contain the threat of industries and emission of pollutants into the environment. Among the main solutions that has been suggested included the use of environmentally friendly methods in the production of goods. Goods that are pollution-intensive are continually being discouraged across the globe. The popularity of company awards for companies that have implemented energy efficient solutions have been on the rise and companies are being evaluated more on the basis of their choice of technology. Companies and industries that have adapted green solutions and more efficient solutions continually receive favorable evaluations. The summits have largely ignored the issue of multinational companies moving to less developed nations because they consider the countries as ‘pollution havens.’ Recent debates have also turned the spotlight on these countries as the issue of pollution havens take center stage (Liang, 2008).
Foreign direct investment has the potential to increase pollution in the developing countries. However, statistics reveal that, contrary to what many believe, FDI can actually lead to less pollution in the countries to which the industries move to. The reason behind this hypothesis being the crowding out of the least energy efficient industries in the developing countries. The multinational companies employ more efficient energy solutions in the production of their products compared to most local industries in the developing countries. The long-term effect of the entrance of the companies is the reduction of pollution as the least energy-efficient companies are forced out of the market. The multinational companies also employ advanced technology that is more energy efficient and that pollutes the environment less. Therefore, the notion of multinational companies being a threat to the global fight against global warming should be evaluated. However, a closer scrutiny of the practices of some multinational companies in the developing countries emphasizes the notion that foreign direct investment contributes to negative environmental impact, especially in the developing countries.
Developing countries face international challenges on the global front. They have to face stiff competition from he developed countries and also suffer from skewed economies of trade that favor the established countries. Lack of capital to mobilize the resources they harbor is the chief problem facing most, if not all, of the developing countries. Attracting foreign investment is, therefore, crucial for these countries. FDI presents a viable solution, albeit with the negative environmental consequences that the solution poses. The negative environmental effects are long-term in nature. The long-term nature probably explains why the developing countries compromise on the long-term nature of the effects of the investment for the short term effects they offer (Liang, 2008). The foreign direct investment promises better economic prospects for the developing nations. These benefits include, but are not limited to, industrialization, more jobs for their citizenry, and a better balance of trade in the international trade arena. When presented with such an opportunity, developing countries find it difficult to turn down the offer.
The law of comparative advantage postulates that exchanging goods and services efficiently results in optimal outcomes. In this regard, the environmental quality is considered a good in the free trade. Based on the postulation by the law of comparative advantage, the environmental quality is boosted by efficient international trade. Efficient international trade means that disparities are eliminated from the equation. One such disparity is an unbalanced balance of payments that affects developing countries. The Foreign Direct Investment factor injects some balance in the equation by improving the economic power of some of the participants, namely, developing countries. Achieving some kind of a favorable balance of payments in the international arena is a step towards a fair and efficient free international trade. Presumably, the quality of the environment factor should benefit from the improved international trade.
Policy and regulatory frameworks in the developed countries have been blamed for the negative foreign direct investment has caused in their countries and to the global scene as well. Developing countries have gone out of their way to revise and enforce laws that are deemed attractive to foreign investors and multinational companies. These laws are made to woo multinational companies to invest in their countries and to promote their economic development efforts. International summits on the global fight against global warming and environment degradation continues to identify the lenient laws as the main factors encouraging foreign direct investment to the developing countries. The ‘pollution haven’ hypothesis continues to gain attention due to its contribution. The multinational companies, in their efforts to expand into new areas, are always searching for environments that offer cheaper operational options as well as additional resources to boost their operations. Developing countries and their incentives fit his criteria perfectly (Yang, Jun & Qiran, 2014).
The pollution haven policy has been discussed in the arena at length and offers three dimensions. The first and obvious dimension being, the relocating of heavy pollution industries from countries that strictly enforce environmental laws in developing countries where such laws are not stringently enforced or are non-existent. The second dimension is, dumping of the waste products from these industries in the developing countries. The third perspective to the pollution haven policy is the unrestrained extraction of natural resources available in the developing countries without regard to their non-renewability. A careful analysis of the three dimensions reveals that the pollution haven hypothesis does carry some weight. However, research does not prove that foreign direct investment directly contributes negatively to environmental pollution. However, FDI contributes to an increase in global pollution. When taking individual developing countries into consideration, it was difficult to determine that FDI had directly contributed to increase in pollution. Instead, countries such as China, show that with increased foreign direct investment, the aggregate increase in pollution decreases (Bao et al., 2011).
However, it has been determined that as multinational companies move to areas with less stringent environmental policies, some have shown less effort in dealing with pollutants in the developing countries. This trend is common across many multinational companies that seek to take advantage of the laxity of enforcement of the laws or non-existent laws to participate in pollution activities. Deforestation across the South American and Asian countries have been largely blamed on multinational companies’ operations across the Southern American continent and Asian continents. Illegal logging in these continents has led people to re-evaluating the role of these multinationals in the world and their contribution towards environmental degradation activities. Initially, multinational companies did not have a duty to play as far as their host environments were concerned. Rampant pollution activities and global environmental degradation have led to a change in laws and policy regulations regarding the way multinational companies contribute to their environments (Yang, Jun & Qiran, 2014). Environmental sustainability and multinational companies’ profitability are no longer separable.
Case Study one: ChinaAmong developing countries in the world, China is the largest, though many people do not classify or regard China as such. In terms of Foreign Direct Investments (FDIs), China is the second largest. The country has made tremendous growth in the last three decades, but the last two decades have been really phenomenal. The injection of foreign direct investment has transformed the country into a middle income economy and the second largest in terms of gross domestic product, behind the United States of America. China has since taken its place among the elite in international trade and its global businesses contribute a significant portion of international trade. In fact, in the recent world economic recession, China is the only country that did not experience negative economic growth. The economic development was as a result of favorable policies that encouraged foreign firms and transnational firms to invest in the country. In the 1990s all through into the new millennium the country grew at an impressive rate of over 10 %. However, even with the improved economic environment, consequences are bound to arise, both positive and negative. The economy has the chief beneficiary of the economic progress. The environment has not been benefitting in a positive sense that reflects the tremendous growth. This paper seeks to examine the environmental consequences that China has had to face due to the large Foreign investments in the country. The paper will seek to evaluate the regulatory framework that China has put in place to address the issues and also to respond to international trade regulations (Yang, Jun & Qiran, 2014).
Initially, China had policies that were lenient on foreign direct investments. Probably, this explains the growth in the rcent past. International trade outcries and international conventions and trade agreements are forcing the global superpowers to re-evaluate their industrial and trade policies and their contribution ot the global environment. Slowly, the country is shifting its stance on foreign investment policies to tighten them up. The country is shifting from a quantitative approach to a qualitative approach. The environmental effect of the foreign direct investments has been put on the limelight with the foreign direct investments being blamed for pollution in the developing countries. The FDIs have also been blamed for the increase in global pollution and the destruction of the Ozone layer. China is being forced to evaluate its foreign policies that have since attracted the foreign investors snd streamline them to be in line with indiustrial policies both locally and in line with international standards. China has been studied in depth in terms of the FDI’s influence on developing countries. China, being the second largest recipient of foreign direct investments, and the largest among the developing countries, it makes sense to use the country as a sample for study. Studies, however, have shown results that contradict the general notion that FDI have a negative influence on the economy. The studies have shown that the FDI contribute to increase in global warming through industrial emissions, but cannot be directly blamed for the negative influence on the environment. Contrary to the popular notion, FDI have been shown, by some studies, to contribute to better environments as local, less efficient firms are crowded out by the large multinationals with more efficient production capabilities.
FDI patterns in ChinaIn the 1980s, the imbalances in FDI sources, location distribution and sector distribution were more glaring. Over time these imbalances have been ironed out as more Investors from Europe and America move into China to claim a piece of the pie. In the 1980s, Hong Kong was the main Foreign investor in China. Its foreign direct investment accounted for over 55% of the total foreign direct investment in China. The U.S, Japan, Europe and Taiwan accounted for an average of 8% each. However, European and American Multinationals have since scrambled into China and taken up a significant share of the foreign direct investments. The Asian countries still hold the largest share of foreign direct investments in China. European Multinationals’ shares have since increased from the 2.4% in the 1990s to 9%. For instance, in Germany, 9 out of 10 large firms have set up subsidiaries in China. Some have even created affiliates in the country (Liang, 2008). The investments are an ideal example of the increasing importance China continues to play not only in the Asian region but also in the World. The manufacturing sector continues to enjoy the lion’s share of the foreign direct investments in the country. The services industry has began to enjoy a significant rise in foreign direct inflows due to deliberate attempts by the Chinese government to liberalize the sector in an effort to attract more foreign investment in the sector. Regional distribution also shows similar imbalances with the coastal region accounting for a majority of the Foreign investment regions. China is half-landlocked and the Eastern region is accessible via the Indian Ocean. Its accessibility and strategic location have been the main factors that have contributed to the imbalance in investments. The coastal region accounts for over 85% of the foreign direct investments with the central region accounting for a percentage slightly less than 10 percent. The western region accounts for the remainder. The chinese government is concerned with the regional imbalances and has taken deliberate steps to change the scenario. Active promotions and favorable policies in those regions have been advertised and implemented with little to show for the effort. It is highly likely that the situation will remain the same for the forseeable future (Yang, Jun & Qiran, 2014).
China’s Regulatory Framework for Foreign Direct Investments
China’s government’s regulatiry framework has a sole objective of attracting FDI with a dual purpose of improving the country’s international competitiveness and to enhance the country’s national strength. National development policies as well as the industrial policies have been streamlined to improve the country’s trade environment. The FDI policies have been linked to both the national polices and industrial regulations. Recently, China has laid emphasis on the quality of the FDI inflows into the country (Liang, 2008). Focus on the contribution to the growth of the country and to the development of the national economy have been the chief reasons for the regulations and policy revisions. China laid its guidelines for acceptance and prohibiting regulations in the 1990s in order to prevent indiscriminate foreign direct investments that would harm the country. Broadly, the foreign direct investments can be classified into four categories. These include encouraged FDIs, Restricted FDIs, Prohibited FDIs and permitted FDIs. The government encourages FDIs in the sectors of the economy that need improvement and also as a measure to balance economic development in all the sectors of the economy. To achieve this, the government evaluates the performance of all the scetors regularly. The sectors of the economy that have not been performing well and that need boosting are promoted and advertised to foreign nations. The FDIs that move into China to invest in the sectors of the economy that are underperforming receive favorable policies and incentives to encourage the firms to invest more. Some of the sectors that China has been encouraging FDIs to invest in include the Agricultural sector, the energy industry, raw materials and in the telecommunications industry. Advanced technology that is aimed at reducing cost of production and to enable the economical use of the available energy resources are also encouraged and, therefore, fall into the encouraged FDI category (Liang, 2008).
The country also encourages FDIs that are export oriented. The export oriented FDI ensure that the country continues to enjoy favorable balance of payments internationally and to remain competitive. Investment in new equipment and new materials that are in short supply and in which the country faces inadequacies are also encouraged in the country. Products that allow effective utilization of resources are encouraged and those that promote the sustainability of the environment. The coastal region is predominantly invested in due to the staregic location it enjoys and the proximity to ports and international trade transport. The country has a responsibility of balancing development within the country. In this respect, it encourages companies that seek to invest in the western region and the central region as well. Products and FDIs that are likely to jeorpardize the stability and the security of the country are probihibited by the foreign policy and legislation. These include products that pollute the environment as well as products and FDIs that negatively affect the social and public interest of the country. The restricted category includes foreign direct investments that are high in emission of carbon and other environmental pollutants. The country also restricts the exploitation as well as the indiscriminate exploration of valuable resources (Bao et al., 2011). These guidelines are set with a purpose of improving the quality of the FDIs and to manage the economic progress of the country. Deliberate attempts have been made by the government to ensure that the foreign policies guiding the admission of foreign direct investment are consistent with national and industrial policies that govern the local trade and business environment. Linking the two sectors of the economy enables the local firms to use international standards to compare themselves with other multinational companies across the globe. The guidelines’ main purpose, however, is to ensure that the FDI do not affect the environment negatively and to remind the FDI firms that they have a responsibility towards the environments in which they operate (Yang, Jun & Qiran, 2014).
Recent FDI policies In China and Actions being taken to contain the problemThe guidelines set by the Chinese government and the ministry of trade have ensure that there is increased transparency in the acceptance and in the admission of foreign direct investments in the country. They have also helped in the balancing in investments in different sectors of the economy as well as in the promotion of growth in the central and western regions that have been traditionally ignored. Recently, there have been an update to the guidelines. These updates include; sector liberalization, whereby the country has opened doors to international investors in sectors of the economy that the government has traditionally kept under wraps. Some of these sectors include the airline industry, finance, wholesale and retail services as well as in the insurance industry. Secondly, the government has also updated its policies on the taxes and made reforms to reflect the recent demands and international conditions. Since the 1950s, China has been levying taxes on FDIs on a consolidated basis. Recently, the government shifted its taxation regime and policies to levy taxes such as value added tax, sales taxes, as well as consumption taxes. The reform was done in 1994 when the country experienced a turnaround in fortunes from foreign direct investments. A unified market rate was taken up and the dual taxation policy that had existed before was abolished (Bao et al., 2011). The import tariff system has also recently been affected by the reforms. Since the beginning of 1996, the country reduced import tariffs even making some exemptions for some FDI projects that fell under the encouraged FDI category. China has also taken stringent measures to improve the post-approval of the FDI’s operations in the country. The FDI firms are monitored to ensure that the FDI operate within the laws of the country and also within the various regulations governing their operations. Mechanisms have been put in place to monitor and to conduct audits of FDI’s operations within the country. The audit practices have been standardized to ensure international policy guidelines and local industry policies are also met (Liang, 2008).
China has always been considered a centrally governed country. The last two decades that have seen the country experience gigantic development has slowly seen China’s market economy converting from an economy that was planned centrally to a socialist market econmy. The shift also puts the Chinese government under pressure to re-evaluate its FDI policies. Up until now, the foreign direct investors enjoy preferential treatment over their local counterparts on many grounds that range from tax exemptions as well as lenient policies. The shift in the market dynamics calls for fair treatment across the divide for all the players in the economy. The country needs to offer preferential treatment based on the location and the industry in order to bring a balance in development throughout the country. The policy regulations need to shift from investor-type regulations towards determination based on the needs of the region and the industry. Liberalization should be accelerated across all the industries, whether local or international. The liberalization will be able to encourage more FDI in sectors that have not traditionally been invested on by the FDIs as well as by local private investors.
Environmental management systemChina has a framework that protects its environment from the negative effects caused by local industries as well as by the large number of foreign direct investments in the country. This framework has, however, faced numerous modifications over the years with each change reflecting the current economic priorities and international policies as well the local needs. Of great importance is the fact the government has been increasingly laid emphasis on environmental issues as the environment takes center stage. For three decades, China has had a policy framework and passed legislation in an effort to protect its environment, not only from foreign direct investments but also from local industries. The evolution of the environmental laws and regulations presently working in the country began in 1973. Since then, the group formed to oversee environmental issues has been improved, other commissions have been formed to help in dealing with the problem and several pieces of legislation have been passed to better protect the environment from harmful effects industrial activities pose to the country and to the world. In 1979, the steering committee categorically outlined its key steps that would guide it in implementation of the various laws and also to help in evaluating the different corporations operating within the country. The country made a conscious decision to avoid ‘polluting then controlling later.’ Essentially, China opted that prevention was better than the cure. In this regard, a national committees and commission to take charge of the environment protection program (Yang, Jun & Qiran, 2014). The experience that was continually being gained in the environment protection activities helped the country to tighten its policies and to ensure that they were effective. Presently, there are over 30 laws that govern the environment in the country. Additionally, there are over 360 standards for evaluating companies and the corporations are expected to meet. 600 rules and regulations have also been issued by local authorities to help in the protection of the environment and to help in the implementation of the basic laws of environmental protection.
The environmental management system is comprised of four main components that help in environmental conservation. These components include:
The environment impact reporting system: The law stipulates that every project in the country must undergo a review process. The review process is referred to as the environmental impact review process. The objective of this review process is to determine if the operations of the project will affect the environment negatively. Before a project is accepted, the review system requires that the project proposal should have an analysis of the expected environmental impact on the country and the preventive measure the project owners intend to take to avoid the negative effects on the environment. This analysis is submitted for screening purposes by the environment administrative officials. After the authorities have carefully scrutinized the report, the firm is asked to contact a qualified firm to undertake a second environmental impact report. The report is presented to NEPA (National Environmental Protection Administration) for approval. Upon approval, a project is admitted. Without the approval, the project is rejected.
The ‘three simultaneous steps’ principle: Article 26 of the environment management Act requires that projects must have a pollution prevention facility and that the facility must be designed, constructed and operated simulateneously with the main project. To ensure that this requirement is met, the NEPA authorities monitor the construction of the projects and a project need to be approved as safe before it can commence its pollution-free activities.
Registering and obtaining a license: The article 27 of the management Act requires that the firms in the country that emit pollutants as byproducts of their operations must register with the relevant authorities and a license obtained for the same. The registration requirements ensure that pollution is monitored and dealt with safely.
The effluent charges system: Firms that emit pollutant materials into the environment beyond the accepted standards are liable to fines and other liabilities. The excess effluent fee is the cost of the excessive pollution. The fee is not a license to pollute nor does it legalize the pollution activities. Instead, the firm is liable for the fee only on the first time of not meeting the standards. Subsequent times are met with stiffer penalties, including an increasing annual fine rate.
The environmental regulatory framework does not discriminate the firms in the country based on whether they are FDIs or not. The regulatory frameworks that have been discussed apply both for the local firms as well as for the foreign direct investors in the country. The Environment Protection Act, manages all activities conducted by all firms operating within the country. Transnational corporations do not face unique laws. However, within the environmental management Act, there are a few articles that specifically address the transnational operations and that help guide their operations in the country. The foreign investors are expected to abide by the laws and regulations in the country. These include both the foreign investors with 100% control of firms in the country as well as those firms that enjoy partial control, joint-ventures. However, the law prohibits the importation of technology that the government consider inferior and environmentally unqualified. Environmental unqualified equipment are also forbidden and importers participating in the import business of such equipment are liable to prosecution and fines. In an effort to encourage FDI in particular sectors the government has specified some criteria than can be used in the admission of FDIs in to the country. In this respect, the country encourages Foreign Direct Investment that utilizes environmentally sound technologies. FDIs that qualify via such qualifications easily get admission into the country. Technologies that encourage the conservation of the environment are also encouraged and used in the admission of the FDIs into the country. However, guidelines and provisions restrict the FDIs from investing in some sectors of the economy, such as the exploration and the exploitation of valuable and rare minerals and those that threaten human life and promote environmental pollution (Yang, Jun & Qiran, 2014).
In China, evidence shows that FDIs have contributed both negatively as well as positively to China’s environment. In some cases, it has shown that the FDIs have contributed to the improvement of the country’s environment while, in some cases, the FDIs have contributed negatively by increasing pollution activities across the country. Recent studies to reveal the level of effect of the pollution activities or lack thereof have not revealed much. Empirical evidence to suggest the level of pollution as a result of the FDI operations lacks leaving the issue up for debate. Some foreign investors have been accused of transferring production activities to China from their countries where such production activities are banned or restricted them. In these cases, foreign direct investment has been received in the form of second hand equipment that do not meet the standards required in other countries. Over 75% of the foreign direct investment received in China is received in the form of equipment. Other companies engage in highly pollutant activities and production activities thatemit destructive pollutants into the environment. For instance, in the 1980s and in the 1990s Hong Kong’s firms in mainland China were the chief contributors to these harmful production lines. Some foreign firms even found their way into China through Hong Kong. Some of these subsidiaries had parent companies and firms in countries such as the USA, the republic of Korea, and Japan. Some of these firms found their way into China before the country could strengthen their monitoring and screening activities. However, China has been trying to find ways to audit the existing firms and to do post-screening. The general perception in China is that the affiliates of companies from the more industrialized countries is better compared to firms from the Asian region that account for a majority of the foreign direct investments. However, studies have shown that even for the affiliates of firms whose parent companies are established in the more developed countries, there is uneven environmental performance (Bao et al., 2011).
Some foreign firms engage in highly destructive activities in China and they continue to do so presently. Some of these firms import waste metals and materials into China and engage in decomposing, renovating and processing of the materials. Some of these waste products include electronic appliances, harmful chemical substances and tires. The processing of these substances has a massive impact on the environment. Some of these firms are even known to import garbage into China for purposes of recycling. The impact of these recycling activities is enormous. In the past, Taiwan used to be the main province for recycling activities in China. In the year 1993, Taiwan banned dealing in waste materials and the firms that were dealing in the waste materials relocated to Shenzei and Zhuhai where they have continued to deal in waste products with enormous effect on the environment. Some firms do not deal with waste materials effectively nor do they adopt and take measures that enable them to address the pollution issue conclusively. Some firms have been known to elude the monitoring mechanisms that the government has put in place to safeguard the country from harzardous industrial activities.
There have been reported incidences where the firms evade government screening and monitoring and engage in pollution activities with disregard of environmental regulations and guidelines. For instance, in 1996, a chemical firm known as Fumao Phospor ltd emptied its sewage into the Yanchang River in China causing heavy pollution. Over 400 people were poisoned as a a result of the incidence. Subsequent investigations revealed that the company had disregarded environment provisions and regulations and had even refused inspection by the local Environment protection board. This incidence brought to the limelight activities of some of the foreign direct investigations and their role in the protection of the environment. As per the regulations, all the companies are supposed to design and construct a facility that addresses the pollution problem and takes care of waste disposal. The firm in question had started operations before building such a facility. Moreover, the firm also switched to the use of high phosphorus raw materials in its productions making its waster products more toxic. The new materials could not be handled by the waste disposal mechanism that the firms later built and could only reduce the acidity of the wastes and the sawage. The firm was subsequently fined and ordered to take measures the pollution it had caused to the river as well as the environment. However, research shows that the middle-sized to the small scale firms are the most notorious in terms of adhering to the regulations and environment laws. The bigger firms are rarely involved in malpractices though some firms have also been involved in such scandals in the past (Yang, Jun & Qiran, 2014).
Workplace safety and health safety measures have also been ignored by the transnational companies operating in China. Some reports indicate that some TNCs that operate in the country in high-risk activities do not have set in place the necessary safety measures for the safety of its employees. Labor protection is largely ignored. For instance, the footwear industry is the most affected as more TNCs relocate to China due to its cheap labor from the rural areas and the efficiency in export processing activities. China is the leading footwear exporter in the world and the industry employs a significant number of people in China. Most of the foreign affiliates use high amounts of solvents and they do not have necessary safety procedures to protect their employees from exposure of the harmful chemicals. Triphenylmethylene is the leading cause of poisoning for such employees due to unnecessary exposure to the chemicals in these foreign affiliate factories. China has made significant steps to improve the laws protecting its citizens and the country from pollution. Its regulations and implementation of the regulations is much stricter compared to most developing countries. However, when China is compared to the developed countries, its environmental standards are much lower and not effectively implemented (Bao et al., 2011). Transnational companies that are having a hard time operating in their countries shift their operations to China to take advantage of the lenient laws in the country. For instance, in most developed countries, the standards for effluents demand that the quantity be determined based on the total amounts of effluents released into the environment. In china, they use the density of the effluents to gauge the effluent minimum quantities. Therefore, some TNCs just dilute the effluents before they dispose of the materials into the environment.
Case study two: Unilever CompanyAn example of such companies is the Unilever Company, a foreign direct investor in Africa. The firm uses a lot of resources and energy in the promotion of consumerism. It aims at increasing the amount of processed food products. By maximizing food processing, the company aims to improve the quality of its products and to increase the costs of the products after the quality improvement. As a matter of fact, Unilever makes very slight changes to the products yet the company charges the consumers more for the similar products (Addock, 2011). For example, the quality the company improves on the strawberry and the toothpaste brands it sells is very minimal, and does not deserve the price increment.
In addition, the firm only changes the visual appearance or language of some of the products and ends up selling the same product but at an increased price. This quality improvement and price increment exercise involve a lot of advertising. Most of the products that are improved using that mechanism never have a lot of demand. Instead, the company creates the demand for the products by itself. It does so through the heavy advertising (Aşıcı, 2013). As a result, Unilever brings several products to the market without assessing the necessity of the products. Since the individuals in the Sothern Europe still go hungry daily, the company can exploit the opportunities in the South (Aşıcı, 2013). As the income of the poor rises in the South, they are likely to spend more on the products. That means the company will make more proceeds from sales to the individuals in the South (Aşıcı, 2013 ).
Because of the type of advertisement used by the company to make rip-off the consumers into purchasing their products of low quality at higher costs, the Advertising-Standards-Authority of the United Kingdom sued the Unilever Company over the false advertisements. The point was that the Unilever Company misled its consumers based on the manner that it introduced to them the health doles of their cholesterol-reducing margarine product known as the Flora pro-active (Korten, 2011).
According to the ASA, one of the subsidiaries of the multinational company, the Van-Den-Bergh foods unit, overexpressed the health outcomes of the margarine. That was done in one of the media in the United Kingdom. The claim by the foods unit was that the margarine could reduce the LDL Cholesterol in the body by around 10-15 per cent (Korten, 2011).
After the correction by the United Kingdom government, the Unilever Company was forced to correct the claims it had made in the media to the consumers. It had to do the same through the advertising means it had used earlier (Pezzey, 2004). That is enough evidence to show the various ways in which the multinational companies use the different ways of advertisements to deceive the populations into purchasing their unpopular products. When the consumers who are hungry for the products that are perceived to be of higher quality, they end up purchasing them without considering the implications on their health. It is because the multinational companies mislead them through the advertisements of the unpopular products (Pezzey, 2004).
The other way in which the multinational companies contribute to the degradation of environmental sustainability is by the domination of the markets in the industries that they operate in. They tend to command a larger market share than the other firms in the industries. That could be because of their international reputation (Korten, 2011). By dominating the market, the multinational companies decide to have a lot of influence in the market. For example, the companies decide the types of crops to be grown in the industry and the types of products to be introduced into the market. It is because of their reputation and influence over the other firms in the industry. In addition, such corporations determine the quantity of demand and supply in the market at different times of the year or seasons (Korten, 2011).
When the companies flood the market with their products, the prices will automatically go down. The contrary happens when they withdraw their products or when they reduce their supply to the market. That leads to a reduction in demand and the prices automatically rises. It is this influence that they use to control the world trade and end up polluting the environment at will since they cannot be regulated strictly in the developing nations in which they operate (Bandura, 2014).
As a result, the local businesses that were already established before the introduction of the multinational companies in the regions are destroyed. The locals who were working in those firms lose their jobs as a result. The country’s economy is also affected negatively. It is because of the closure of several companies that were contributing to the nation’s GDP. The effect of the establishment of the international companies contributed to that (Dijkstra, Mathew & Mukherjee, 2011).
For instance, the Unilever Company is the largest tea company in the world. The company owns more than eighteen thousand hectares of land in three countries. The countries include Kenya, India, and Tanzania. By the year 1999, the company controlled more than twenty per cent of the market. The figures have, however, changed with time. The firm currently controls approximately fifty percent of the market and the dominance is expected to increase with time. The key brands owned by the company include the Lipton’s and the Brooke Brands (Dijkstra, Mathew & Mukherjee, 2011).
Because of that, the factory has control over the prices of tea in the world. That can be confirmed by the situation which was observed in India in the year 1980. During that time, the prices of the Indian tea rose (Bandura, 2014). The Unilever Company and the other multinational companies still wanted to purchase the Indian teat the normal prices. As a result, they decided to boycott the Indian tea in order to ensure the price reduced as they wanted. That made the prices to drop (Dijkstra, Mathew & Mukherjee, 2011). However, the Indian government was not going to take that for granted. Instead of complying with the demands of the multinational companies, the government set up the minimum price that could be used to export the Indian tea. That was one of the measures to control the prices and to add value to the Indian tea.
The effect was that the multinational companies withdrew from the market as a way of ensuring that the prices were set in their favor. Finally, the Indian government had to comply with the requirements of the multinational companies. It was because the demand for the Indian tea had reduced and there was little market for the products. That illustrates how the multinational companies control the prices of products as a result of their dominance over other firms in the industry (Dijkstra, Mathew & Mukherjee, 2011).
The other aspect of the multinational companies is that they exploit the natural resources in the developing nations. That leads to the misuse of the natural resources like forest lands and other resources that make the environment unsustainable. The Unilever Company is a good example in this case. The eighteen hectares of land that the company holds in the three nations, namely Kenya, India, and Tanzania is evidence of the level of exploitation that the multinational companies have in the developing nations (Addock, 2011). The fact that the land is covered with tea plantations and other structures made by the firm shows how much forest land was cleared to pave way for more than eighteen thousand hectares of land. Taking an example of Kenya, the company cleared the Forest land in Kericho, Kisii and Nyeri counties, amongst others, to plant the tea that they would later use as the raw material for the company. Some of the forests acted as water catchment areas in those regions. Also, by reducing the forest cover in the various nations, the company contributed to environmental unsustainability (Addock, 2011).
One of the reasons given by various scholars on the exploitation of the raw materials and other resources in the African countries and the other developing nations is that the resources are availed cheaply by the governments (Aşıcı, 2013). Also, there are no proper regulations on imports and exports in the developing nations to govern the operations of the multinational companies. The other factor contributing towards the exploitation and environmental degradation of the developing countries is that there are no proper regulations on the conservation of the environment as outlined above. It is, therefore, cheaper to trade in the developing nations and to dispose the abandoned products in the low-income countries of the world (Aşıcı, 2013).
Even if the rules and regulations governing the contribution of the multinational companies to the environmental sustainability, the firms could still avoid them. An example of that is in the Kenyan situation. The Unilever Company has destroyed vast forest land. The policy in Kenya concerning logging is that for every tree and individual cuts, he or she has to replace the same by not less than four new plants (Aşıcı, 2013). That means the Unilever Company, according to that policy, should have planted some man-made forests elsewhere within the country to replace the ones cut to create room for the tea plantations and factories in Kenya. That indicates the fact that the governments in the developing nations do not apply their own legislations on environmental conservation when dealing with the multinational companies. Because of that, such firms are free to pollute the environment and make it as sustainable as possible at will (Aşıcı, 2013).
In addition, there are some advances made by the multinational companies that tend to interfere with the sustainable development and the sustainability of the environment. For instance, the multinational companies always merger and share or divide the various markets in the world amongst themselves. An example of that merger is evident between the Protector & Gamble Company and the Unilever Company (Korten, 2011). During that merger, the two large corporations came together and decided on important issues, amongst them, the disclosure of important information relating to competition. Although most of the terms of the agreement were never discussed or disclosed to the general public, the chairman of the P&G Company confirmed that the merger was made in the best interest of the two companies (Korten, 2011).
From the statement of the chairman of the P&G Company, it is evident that the decisions of the two multinational companies never focused on the interests of the consumers of their products. Instead, they were only concerned with those of the firm. That shows that multinational companies are never worried about the effects of their decisions on the consumers, but instead on the impacts of such decisions on the expansion of the market share and the profit maximization (Korten, 2011).
Further, when such mergers are done to avoid competition in the market, the other companies or firms that could offer better products are deprived of the market share. That leads to the death of the local companies and further lead to unemployment in the developing countries and other parts of the world (Dijkstra, Mathew & Mukherjee, 2011). A company that may not be concerned with the conservation of the environment may end up exporting its products to other parts of the world as a result of the partnerships. An example of a merger that led to the deception of the US consumers was the merger of the Silk Soymilk Company with Dean Foods Company resulted in the production of finished products by the company that had more harmful effects to the human than those of the original company (Dijkstra, Mathew & Mukherjee, 2011).
Despite the fact that the company has produced more products into the market, the move is unpopular amongst several economists and environmental conservationists. It is because the sales strategies used by the firms or companies tend to be environmentally unfriendly (Dijkstra, Mathew & Mukherjee, 2011). For instance, there are several ecological costs are associated with the processing of the products, packaging, processing of the wastes, the transportation of the products, amongst other activities of the firms. If the individuals in the Southern parts of Europe begin to consume a similar amount of products as those in the North, the environment will not be in a position to survive. It is because of the large amount of the pollutants that will be introduced in the process (Dong, Gong & Zhao, 2012).
When the rate of production increases, more resources are utilized and more wastes produced in the process (Dong, B., Gong, J., & Zhao, X. (2012). The same applies to the consumption of the products by the populations. When more is consumed, the amount of wastes to be disposed also increases and more equipment is needed to get rid of the wastes and prevent them from polluting the environment. As such, the only practicable solution to environmental sustainability is less production and less consumption of the products (Dong, B., Gong, J., & Zhao, X. (2012).
However, it is surprising that Unilever and the other multinational companies are doing the opposite. They do so in order to realize more profits that result from the increase in consumption. That is why the conservation of the environment becomes a difficult task when the multinational companies that are after profits are involved (Paul, 2014). Less production will mean less profits or income for the firms and that may lead to the collapse of some companies. When the firms collapse, the individuals that depended on their products for survival may have no alternatives and will be negatively affected in the process. That makes the debate more complex than it was perceived earlier (Paul, 2014).
It is because the various individuals would like to reduce the negative effects of the multinational firms with respect to the environmental pollution and at the same time ensure that the same companies produce the food that they eat in the quantities that will satisfy their needs. When the production reduces was the population increases, there will be scarcity and many consumers will be disadvantaged (Paul, 2014). That means that the production has to increase.
The best way to solve that problem is to ensure that the production of all the goods and services by the multinational companies are done in a way that is environmentally friendly and sustainable (Paul, 2014). That means the whole process has to be done in a way that aims at conserving the environment. The manufacturing process involves the acquisition of raw materials to the production of finished products and disposal of the wastes and recycling of the byproducts.
Even though the multinational organizations are known for the environmental pollution, some individuals who argue that the economic development brought about by the organizations can promote environmental conservation measures (Pezzey, 2004). It is because when there is economic development, there will be enough resources to be used in the conservation of the environment. The organizations are in a position to sponsor environmental awareness campaigns (Pezzey, 2004).
The above claim is supported by the neo-liberal economists. Those economists argue that the multinational companies can be the best players when it comes to the conservation of the environment. They argue that such companies have the latest technologies that promote a greener environment. As such, these companies tend to promote environmental sustainability and sustainable environment. It is because the corporations have proper environmental conservation measures in their mother countries and could extend the same to the developing nations of the world where they have their subsidiaries (Paul, 2014).
In addition, the products imported by the developing nations from the multinational companies are always environmentally friendly. Because of that, these companies are the best when it comes to the promotion of greener technologies in the developing countries. According to the neo-liberal economists, the multinational companies tend to create the pollution halos instead of the assumed pollution havens in the developing nations of the world where they access markets for their products (Eskeland and Harrison, 2010).
That can be supported by a research that was carried out by Harrison and Eskeland in the year 1997. The research or study found out that foreign ownership of companies in Venezuela, Mexico, and Cote d’Ivoire led to the use of cleaner and lower energy levels as compared to the others owned by the locals. That means that the subsidiaries in those nations that owned by foreign firms had more environmentally friendly programs or initiatives as compared to the home industries (Eskeland and Harisson, 2010).
In addition, a research carried out by Wu and Blackman in China confirmed that the foreign investment in the energy sector improved a lot on that sector in terms of the environmental conservation (Blackman and Wu, 2013). It is because the investments in the energy sector led to more use of electricity as a source of energy and the process of production of the current electricity reduced the use of other energy sources. As a result, the pollution to the environment was reduced by the foreign investments in China (Blackman and Wu, 2013).
Even though the Unilever Company has been one of the multinational firms that contribute to the environmental pollution, it has some practices that can be considered to be environmental conservation initiatives (Lan, Kakinaka & Huang, 2012). One of the ways in which the company helps in the conservation of the environment is through its packaging design that is innovative in nature. The company has been using a technology known as the cutting edge design. In that technology or design, the appropriate or necessary materials to be used for the packaging based on the functional necessities of the products or goods to be held in those packets (Lan, Kakinaka & Huang, 2012).
After that, the design is optimized in terms of the sustainability requirements. When it is done, the needs of the various aspects of the products are taken into consideration. They include the consumers, the presentation of the product, and the transportation of the product. That means effective and more innovative packaging by the multinational companies like the Unilever Company can be effective in the conservation and environmental sustainability. The packaging enhances the lifecycle of the products and leads to the conservation of the environment. It is because proper packaging prevents the leakage or spoilage of the products of the Unilever Company (Bandura, 2002).
By so doing, it prevents the firm from releasing the unwanted materials into the environment. When that happens, it assists in the conservation of the environment. From that strategy, it is evident that the process of conservation of the environment by the multinational companies should not take a normal course. It is because the common ways used by various organizations of the world may not be applicable to all and might not achieve the desired results. Instead, the various companies should come up with more innovative ways of maintaining environmental sustainability even as they engage in the production processes in those companies (Lan, Kakinaka & Huang, 2012).
There are other environmental conservation exercises that those organizations or companies can assist in. That is why it is not in order to talk ill of the organizations or companies without considering the positive side of their contributions to the environmental conservation measures (Pezzey, 2004). Even if the companies never existed in the first case, they are still needed when it comes to environmental conservation and sustainability. It is because the daily activities by individuals in different parts of the world lead to production of wastes that must be treated and disposed in the right manner (Pezzey, 2004). People will still live and will consume the natural resources and produce wastes in the process.
A lot of resources are needed to dispose the waste materials. In order to get rid of the wastes, a lot of resources are needed. These multinational companies or firms become useful in the provision of the necessary resources in the eradication of environmental pollutants. They do that through their participation in the promotion of green energy and corporate social responsibility activities (Lipper, 2009). That is the reason for the alternative hypothesis on the issue of environmental pollution by the multinational companies or corporations (Lipper, 2009).
The extent of influence of these multi-national corporations on developing nations can be demonstrated by their economic influence. A research by Murphy, Clark, Leyshon & University of Wales, found out 40,000 Organizations, controlled two thirds of the total world trade in goods and services (Kang, 2007).
Additionally, most of the corporations that were not adhering to environmental policies were mainly multinationals (Murphy, 2000). The fact that such organizations are treated by the developing nations’ governments as superior makes it difficult for the governments to control their activities. As such, they end up causing environmental pollution, in addition to unsustainable economic projects. They produce wastes that they do not care about treating before they discharge them into the water bodies and the environment at large. That results into a lot of negative impacts on the environment by the multinational companies (Kang, 2007).
There are many interventions on the effects of the multinational companies on the prevention of environmental pollution. Many government departments and organizations argue that the process of environmental conservation should be a voluntary exercise that should be done by the organizations as an integral part of their corporate social responsibilities (Kang, 2007). That should not be the case in the promotion of sustainable environment in the world. It is because most of the environmental conservation measures are in conflict with the key goals of many organizations and industries in the world (Kang, 2007).
The implementations of the programs are very expensive and needs a lot of resources, time and skills to implements effectively. Because of that, the organizations, when allowed to do it voluntarily, will only practice the less effective methods of promoting sustainable environment (Kang, 2007).
For instance, instead of coming up with proper sewerage systems, the companies will simply build channels to deliver their wastes, after or before treatment, to water bodies or land masses (Lan, Kakinaka & Huang, 2012As such, the voluntary programs should be used to supplement the other control measures. That calls for the strict governmental regulations on environmental conservation and sustainability as the best way to prevent the multinational companies from polluting the environment. The other control measures and interventions should just be used to supplement the regulations set by the various governments in the control of environmental pollution. That is the best way to prevent the multinational companies from polluting the environment at will. There is, therefore, need to control the activities of such companies both in the developing and the developed nations of the world (Kirkulak, Qiu & Yin, 2011).
Case study three: AfricaFDIs and the environmental impact in AfricaAll of Africa is essentially considered a developing market with several of its countries making giant economic strides towards establishing themselves as emerging markets and, therefore, attracting more foreign interest in terms of investments. The African continent, especially the sub-Saharan side is endowed with resources, minerals and other precious non-renewable resources. For these countries, these resources are considered their ticket to economic prosperity and development. They feel the need to utilize the money collected from these resources, in the development of their own nations. More often than not the countries do not have the expertise nor the technology to carry out the extraction of these resources. Foreign companies from established countries are the chief beneficiaries of this scenario. In this section of the paper, a selected number of countries from sub-Saharan Africa will be considered and how the FDIs have impacted their environments.
South Africa is among the richest countries in Arica located at the southern tip of the African continent. The country is endowed with large reserves of minerals, which include gold, platinum, manganese, chromium and vernadium. There are also significant reserves of diamonds, iron, uranium, nickel and titanium. The mining sector forms the largest working sector in the country. The country is one of the largest recipients of foreign direct investments in the African continent as mineral exports contribute a third of the country’s export revenue. With the many foreign companies and the mining sector being active, the impact of these environments cannot be ignored. Mining activities usually have by-products that are harmful to the environment. The environment is a beneficiary of the process and the government has taken steps to protect the environment from negative impacts. The South African Constitution has enshrined the right to an environment that is considered healthy and not harmful to the well-being of its citizens. In this regard, the Mining Act in the constitution safeguards all mining activities and outlines the measures that mining firms need to adhere to while carrying out their activities within the country. The Mine Act and the safety Act also have regulations that stipulate and govern the working environment of workers at the mne sites. A closure certificate is required after firms complete their mining activities in a particular location. The certificate is only issued after the firm engages in rehabilitation programs of the mining site and leaves the mining surface a secure place. Noncompliance to the laws governing the processes may lead to prosecution of the license holder or the withdrawal of the license.
The major environmental issues arising out of the mining activities in South Arica include atmospheric emissions, tailings management, acid mine drainage, and mine-dewatering. The country also faces problems that arise out of past mining activities and grounds that were left un-rehabilitated. The Environmental Management Plan (EMP) was introduced to ensure that all the mining firms adhere to environment conservation requirements. Abandoned gold and coal mines have affected the country’s environment over a period of time, but stringent rules and regulations have been placed to safeguard the environment from further damage. Compared to other developing countries such as China, however, reveals a significant lower number of FDIs in the mining sector. The negative impact of the firms cannot be quantified due to the low number of FDI operations in the mining sector. Their positive contribution to the environment cannot be quantified as well.
Zambia, another south African country also faces a similar situation in the mining industry. However, unlike South Africa with a diversified portfolio of minerals and resources, the country is highly dependent on Copper. In the 1990s, copper accounted for over 90 percent of the country’s export revenue. By 1985, mining activities from FDI were conducted without regulations. The companies did not have environment protection obligations in the 1980s, which led to widespread pollution activities. In fact the government would assure them of protection against being charged for damages to the environment. Since 1985, however, several Acts have been enacted to conserve the environment and regulations have been developed to ensure that the mining activities are safe for its citizens. The government, together with private entities, has in the recent past conducted various cleanup exercises targeting pollution caused by past FDI operations.
ConclusionForeign direct Investments in developing countries have shown both positive and negative impacts on the environment in the host country. In this paper, the Unilever company, China, South Africa and Zambia were used as case studies to examine the role of the FDIs with respect to the environment in the host country. China’s example is the best, owing to the large number of FDIs into the country and the role they have played in turning the country’s economic prosperity. Developing nations are known to have more lenient laws as far as governing and regulating operations for foreign direct investments. For some countries, they look the other way due to the economic impact some firms have on their countries. The lenient laws are used to attract more foreign investments and have contributed to the term ‘pollution haven’ used in reference of developing countries. However, studies have not been able to quantify the actual impact of the FDI’s operations with some critics arguing that FDIs have contributed to better industrial operations in developing countries. In some way, the FDIs have contributed to the improvement in efficiency of production in the host country and reduced emission of pollutants due to better technologies and more efficient management of wastes compared to local firms in the host country. On the other hand, some firms have been reported to engage in unlawful activities that have little consideration for the host country’s environment. However, evidence has shown that FDIs have had a considerable negative effect on the host countrys environments and only improving regulations are putting some of these operations in check.
Developing countries need to put in place countermeasures to ensure that the problem of FDI pollution is not a menace to their countries anymore. Relaxing legislation for short term benefits is selfish to future generations due to the non-renewability of some of these resources. Countries that pass legislation, but do not enforce them fully also harbor negative FDIs and encourage pollution in their own countries. The deteriorating global conditions are calling for more developing countries to put in place stricter measures to ensure that FDIs are beneficial to them, not just economically but also to their environments. The developing countries should have agencies that keep monitoring the FDI investments in the countries to ensure that even after being approved that they maintain the required standards within their countries. Such bodies should have the mandate, the necessary laws and the political backing of the government to ensure that their efforts are beneficial to the country and its citizenry.
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