RYAN TANG AND JING YU YANG |
In today’s global economy, many of the world’s most pressing challenges sit at the intersection of growth and sustainability. One big question is how emerging market firms—businesses in fast-developing economies—can grow profitably without further damaging the environment.
A recent study of Chinese firms provides important insights into this issue. It shows that foreign direct investment (FDI)—money invested across borders—can play a crucial role in helping companies become more environmentally innovative. But not all firms learn in the same way, and the culture or “logic” of how a company is run matters.
Environmental innovation means creating new methods, processes, or products that reduce harm to the environment while still supporting business growth. This could involve cleaner production techniques, energy-efficient technologies, or new ways of managing resources.
For emerging market firms (EMFs), the challenge is steep. Many are new to global competition and may lack experience in addressing the environmental side-effects of industrial growth. That’s where FDI comes in.
How FDI helps firms learn
FDI works in two ways:
- Inward FDI (IFDI): When foreign companies invest in a country, local firms can learn from observing their practices—such as advanced environmental standards or cleaner production technologies.
- Outward FDI (OFDI): When firms from emerging markets invest overseas, they must directly comply with environmental rules and practices in other countries. This creates hands-on learning opportunities.
Both forms expose firms to diverse environmental regimes—the rules, regulations, and practices that shape how countries protect their natural environments. Exposure to this diversity can spark innovation as firms adapt, combine, and experiment with new approaches.
Not all firms learn equally from these opportunities. The study highlights the importance of institutional logics—the values and guiding principles that shape decision-making.
Firms influenced by market capitalism logic (typically private companies focused on profit and competitiveness) are more likely to use what they learn from FDI to drive environmental innovation.
Firms guided by state socialism logic (often state-owned companies focused on government priorities and social objectives) are less likely to translate exposure into environmental innovation.
In short, company ownership and culture influence whether exposure to international environmental practices actually leads to greener outcomes.
Why this matters
China’s experience offers lessons for other emerging markets. As countries seek growth while tackling climate change, encouraging environmental innovation is vital. Firms that engage in international investment—whether hosting or investing abroad—gain unique learning opportunities that can help them balance economic and environmental goals.
However, without the right incentives and frameworks, some companies may not take up these opportunities, or worse, they may transfer environmentally harmful practices to countries with weaker regulations.
Recommendations
Based on the study’s findings, here are some practical steps for business leaders and policymakers:
For firms:
- Look beyond profit: Treat FDI not just as a financial or technological opportunity but as a chance to learn new environmental practices.
- Encourage a culture of innovation: Firms with flexible, competitive mindsets are better placed to turn international exposure into environmental gains.
- Invest in staff learning: Build internal capacity to adapt and implement best practices learned abroad.
For policymakers:
- Incentivise environmental innovation: Offer support programs, tax breaks, or recognition schemes for firms that integrate sustainable practices learned through FDI.
- Strengthen environmental standards: Ensure that foreign and local firms alike operate under clear, enforceable rules that prevent the transfer of harmful practices to weaker markets.
- Promote knowledge sharing: Encourage collaboration between foreign investors and local firms so environmental expertise is widely shared.
Conclusion
Foreign investment is not just about money—it is also about knowledge. By engaging with diverse environmental standards around the world, emerging market firms can learn how to innovate in ways that protect the planet while supporting sustainable growth.
The key lies in creating the right culture within firms and policies within nations to ensure that these learning opportunities are turned into real, lasting environmental benefits.
Dr Ryan Tang is a member of the Griffith Asia Institute, and Associate Professor Jing Yu Yang is from the School of Business, University of Sydney.
Acknowledgement: This blog post was prepared with the assistance of ChatGPT to support the adaptation of the following journal article into a concise, reader-accessible synopsis: Ryan W. Tang, Jing Yu (Gracy) Yang, Diversity in foreign direct investment and environmental innovation of emerging market firms: The effect of ownership-conveyed institutional logics, Journal of Business Research, Volume 172, 2024, https://doi.org/10.1016/j.jbusres.2023.114405.
