Foto: NTB Scanpix

DEMONSTRATION: Chinese companies building the Myitsone Dam in Myanmar. ‘A controversial project, with an estimated total cost of USD 3.6 billon and a reservoir area larger than Singapore. This was intended to be one of the largest foreign direct investments in Myanmar. However, due to the negative environmental impacts and local protests, all construction has been suspended’, explains Senior Research Fellow Roman Vakulchuk (NUPI).

Chinese and Japanese investments in Myanmar – what determines their environmental friendliness?

Published: 24 Jun 2021

What determines whether companies investing in developing countries proceed in an environmentally friendly way? A new article published at level 2 by researchers at Harvard and NUPI examines this question.

Chinese and Japanese companies are major sources of Foreign Direct Investment (FDI). They have been deeply in involved in Myanmar since 2012.

Lower environmental standards

A major issue related to FDI concerns the environmental impacts.

‘When they invest in developing countries, many firms tend to adopt lower environmental standards compared to when they invest in their home countries or developed countries. It is unclear whether this is due a lack of environmental regulations or enforcement in developing countries, or is a consequence of the limited internal resources of foreign firms’, says Senior Research Fellow Roman Vakulchuk (NUPI).

Together with Indra Overland (Research Professor, NUPI) and lead author Thiri Shwesin Aung (Research Fellow, Asia Center, Harvard University), Vakulchuk has authored the article ‘Environmental performance of foreign firms: Chinese and Japanese firms in Myanmar’, which has been  published in the Journal of Cleaner Production, ranked at level 2 in the Norwegian system.

Mapping what shapes environmental performance

On the other hand, some firms tend to adopt high environmental standards independently of host-country regulations.

As Vakulchuk notes, ‘The diversity of environmental standards is puzzling – a point that we examine in detail in our study of Chinese and Japanese firms in Myanmar. With a better understanding of these differences, we can map the factors that shape the environmental performance of foreign firms in developing countries. This in turn can provide insights for decision-makers, international investors and international organizations.’

Chinese firms: Internal resources are crucial

Vakulchuk and his two colleagues have examined 421 Chinese and Japanese firms operating in Myanmar.

‘Our main finding is that national-level environmental regulations have limited impact on Chinese firms. These firms pursue environmentally friendly policies in Myanmar mainly when they have pro-environmental leadership and the internal financial resources to do so. Simply put: if a Chinese company has the capacity and financial resources, it is likely to follow high environmental standards and allocate resources for an environmentally friendly policy. If, however, it has limited internal resources, it will probably not pay much attention to local environmental standards in Myanmar, regardless of regulatory pressure from the local authorities.’

The picture is somewhat different in the case of Japanese companies:

‘When it comes to Japanese companies, both regulatory pressure and internal human and financial resources are important as regards their approach to environmental issues. That is the main difference between the environmental performance of Chinese and Japanese firms operating in Myanmar’, Vakulchuk explains.  

Will require USD 650 billion by 2030

There are several reasons for examining Myanmar specifically as regards Japanese and Chinese operating there, according to Vakulchuk. When Myanmar opened up to the international community in 2012, it needed significant foreign direct investment to develop economically. In a previous study, Vakulchuk, Overland and colleagues showed that Myanmar would require a total of USD 650 billion by 2030 to meet its growing demand for energy – and USD 170 billion of this amount would have to come from foreign investors.

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To this, Vakulchuk adds: ‘China and Japan represent different business cultures, and their firms are known for using different business development strategies, which makes the comparison interesting.’

Regulatory pressure diminished after coup

Some major FDI recipient countries are now promoting ‘green FDI’, and focusing on adverse environmental externalities and economic growth. However, political turmoil may curb efforts to uphold sustainable FDI policies, as Vakulchuk explains:

‘We conducted this study before the February 2021 coup in Myanmar took place. Given the current political situation and the pandemic, it has been very challenging for foreign firms to sustain their operations there. Some have left Myanmar – but not all. On the whole, regulatory pressures on foreign firms have diminished due to the political turmoil.

‘In turn, that means that foreign firms continuing to operate in Myanmar will need to become more proactive in upholding high environmental standards also when there is little government supervision. In other words, foreign firms need to improve their own environmental performance and thus become agents of positive change. They need to make sure that local stakeholders benefit and the environment is not harmed by their operations’, Vakulchuk concludes.

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