Foreign production and the environment: does the type of FDI matter?

Abstract

ABSTRACT We examine the relationship between foreign ownership and the environmental performance of firms. We make a distinction between export-oriented and horizontal multinationals as they have different motivations and firm characteristics. Horizontal foreign direct investment substitutes for exports when trade costs are high, while export-oriented vertical multinationals geographically separate the stages of production primarily to exploit production cost differences across countries. Theoretically, it is not clear which type of foreign direct investment is dirtier. In this paper, we use microdata from Chile and find that export-oriented foreign firms have lower emission intensity than horizontal affiliates and domestic firms.