A recent working paper published by the World Bank suggests that although foreign direct investment (FDI) from OECD (Organisation for Economic Cooperation and Development) countries can raise environmental standards, investment from overseas Chinese sources, which accounts for almost 70% of mainland FDI, lags seriously behind.

The paper poses the question 'Are foreign investors attracted to weak environmental regulations?' and studies the case of China, disaggregating foreign investors according to their place of origin.

It finds that FDI has 'the potential to improve environmental outcomes in host countries', but also states that 'For the sample of projects from OECD source countries, we find no evidence of pollution-haven-seeking behaviour by investors. In contrast, project in highly polluting industries from Chinese sources (Hong Kong, Macao and Taiwan) are significantly deterred by pollution taxes.'

Environmental regulations differ from province to province, allowing investors to make profit forecasts based on a range of criteria, including the cost of adherence to environmental regulations.

Two thirds of China's FDI comes from overseas Chinese investors, notably in 'Greater China' and South East Asia. They, the paper suggests, have weaker environmental concerns than OECD investors, often reflecting weak regulations in the place where they are headquartered. This reduces pressure on companies to develop cleaner technologies and engage in technology transfers, which are singled out as keys to promoting high environmental standards. Around three quarters of OECD investment engages in technology transfers as against 30% from Chinese sources.

The full report, Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China is available on the World Bank website: http://econ.worldbank.org/files/41274_wps3505.pdf

Report by Matt Perrement March 14 2005