Energy savings through foreign acquisitions? Evidence from Indonesian manufacturing plants


The link between foreign ownership and environmental performance is a controversial issue. Some argue that highly polluting multinational companies relocate to countries with weaker environmental standards in order to avoid costly regulations in their home countries. In this way, they increase pollution levels in host countries and also globally. However, others point out that since multinationals tend to use more efficient and cleaner technologies than their domestic counterparts, foreign direct investment (FDI) can have a positive impact.

Using data from the Indonesian Manufacturing Census for the period 1983–2001, this study finds that while foreign ownership increases total energy use and carbon dioxide emissions in acquired plants due to expansion of the production scale, it reduces the energy and emission intensity of output. In contrast, foreign divestments tend to increase energy intensity.

The study finds that entry of foreign-owned plants is linked with industry-wide reduction in energy intensity. It also finds that plants with higher energy intensity (possibly smaller and less efficient plants) tend to reduce their energy and emission intensities more than those that are already less energy intensive.

The study concludes that FDI can serve as a channel for international transfer of environmentally-friendly technologies and practices, thus directly contributing to environmental progress. The study also provides direction on how to maximise the positive environmental benefits of FDI, which not only includes attracting foreign investors but also formulating policies that directly affect energy prices.

Key points for decision-makers:

  • FDI can serve as a channel for international transfer of environmentally-friendly technologies and practices.
  • Foreign divestments may not only reduce productivity but also increase energy intensity.
  • Plants with higher energy intensity (possibly smaller and less efficient plants) tend to reduce their energy and emission intensities more than those that are already less energy intensive.
  • Maximising the positive environmental benefits of FDI not only includes attracting foreign investors but also formulating policies that directly affect energy prices.

ISSN 2515-5717 (Online) – Grantham Research Institute Working Paper series
ISSN  2515-5709 (Online) – CCCEP Working Paper series