DP13810 Good for the Environment, Good for Business: Foreign Acquisitions and Energy Intensity

Author(s): Arlan Brucal, Beata Javorcik, Inessa Love
Publication Date: June 2019
Keyword(s): energy intensity, FDI, Foreign acquisition, foreign divestment, Indonesia
JEL(s): F21, Q56
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13810

The link between foreign ownership and environmental performance remains a controversial issue. This paper contributes to our understanding of this subject by analyzing the impact of foreign acquisitions on plant-level energy intensity. The analysis applies a difference-in-differences approach combined with propensity score matching to the data from the Indonesian Manufacturing Census for the period 1983-2001 (or 1983-2008 in robustness checks). It covers 210 acquisition cases where an acquired plant is observed two years before and at least three years after an ownership change and for which a carefully selected control plant exists. The results suggest that while foreign ownership increases the overall energy usage due to expansion of output, it decreases the plant's energy intensity. Specifically, acquired plants reduce energy intensity by about 30% two years after acquisition, relative to the control plants. In contrast, foreign divestments tend to increase energy intensity. At the aggregate level, entry of foreign-owned plants is associated with industry-wide reduction in energy intensity.