تامین مالی سرمایه گذاری در فن آوری های سازگار با محیط زیست: سرمایه گذاری مستقیم خارجی در مقابل بدهی های مالی خارجی

This paper develops a screening model to examine the relationship between alternative sources of private capital and investment in environmentally sound technologies (ESTs). In the model, a polluter (agent) must secure investment funds from the international financial markets in order to upgrade its production and abatement technology. The requisite capital can be obtained via either market loans (debt finance) or foreign direct investment (FDI). Under debt finance, the foreign financier supplies only capital and the relationship between the two parties is more ‘arms-length’. By contrast, under FDI, the investor delivers both capital and managerial skills. We use the model to derive the implications of debt finance for optimal investment decisions and compare them to those obtained under FDI. Investment incentives are more pronounced under debt finance.

The explosive growth in the flow of private capital from rich to developing countries over the last few decades has reignited intense research on the determinants and the potential impact of these flows. The preponderance of this inquiry has, however, tended to focus on the macroeconomic aspects of this phenomenon.1 Less well investigated has been the role that these flows play in determining environmental quality. This omission is not trivial. It is widely recognized that private foreign investment can provide the resources and capacity to address environmental challenges that confront financially constrained economies (Gentry, 1998 and OECD, 1997). Understanding the interaction between these flows and environmental protection is therefore important from both a practical and a policy perspective. This paper explores the relative importance of foreign direct investment (FDI) and foreign debt for environmental quality. The environmental impact of foreign private capital is still not well understood: there is inadequate data and only a limited understanding of the basic science involved. Gentry (1998) perhaps represents the earliest attempt to investigate this question. Using the experience of Latin America, the author uncovers a number of cases that appear to lend support to the presumption of a positive relationship between capital flows and the environment: in Brazil, Aracruz Celulose, the world’s largest producer of hardwood short-fiber cellulose and a joint venture between Norwegian and Brazilian investors, upgraded its production process, nearly completely eliminating chlorine emissions load while enhancing productivity; in Mexico and Argentina, privatization of government operations led to reduced pollutant loads; in Costa Rica, more effective protection of some sensitive sites was accomplished by applying the proceeds of private investment.2 Strictly speaking, the foregoing examples are testament to a positive environmental impact of only one form of international capital, namely FDI. Nevertheless, there are a number of plausible reasons to expect this optimistic relationship to prevail between private capital flows in general and environmental performance: First, improved technologies that waste fewer raw materials and energy have an environmental advantage that complements a firm’s cost advantage (see the example of Aracruz Celulose). Capital flows simply provide the means by which resource-constrained firms can adopt such technologies more quickly (Gentry, 1998 and OECD, 1997). Second, because they are less powerful politically or on account of their ‘deep pockets,’ multinational investors may face heightened regulatory scrutiny or pressure from domestic environmental groups—a risk that can best be mitigated by reducing emissions or damages (Wheeler, 2001 and Gray and Deily, 1996). Third, international commercial lenders, fearful of being seen as profiting from pollution, may require their borrowers to comply with the environmental laws of their countries, and in this way supplant the relative absence of enforcement in many of these economies. The idea that capital flows can have a positive environmental influence as posited above is fascinating. These flows, however, are not monolithic; they represent distinct financial instruments. There is thus a need to develop a simple framework that can generate predictions about the relative importance, for environmental decision-making, of each type of capital flow. To the best of our knowledge, there are no adequate models that accomplish this task. Herein lies the main contribution of this paper. We build a screening model to investigate how using debt versus Foreign Direct Investment (FDI) as alternative sources of foreign capital can affect the incentive for a wealth-constrained polluter in a developing country to invest in environmentally sound technologies (ESTs). In so doing, we incorporate foreign capital into the standard theory of pollution control. In the model, an operator (agent) of a polluting firm must secure financial resources from a risk neutral foreign investor in order to undertake a project. The project involves large-scale modernization (“greening”) of the production process through the acquisition and installation of a cleaner technology. Its expected cash flows depend upon the amount of investment in the clean technology, the productivity of the firm and the foreign investor’s direct input (or effort). The model allows for both adverse selection and moral hazard problems. There is adverse selection in that the agent has private information regarding the productivity of the firm. There is a moral hazard problem because the agent’s investment decision is unobservable and cannot therefore be contracted upon. Given this information structure, a financial contract need not only motivate the agent, but more importantly, facilitate the transmission of information from the agent to the investor. We distinguish between FDI and debt on the simple, and we believe very plausible, premise that the mode of finance critically affects the interaction between the private information possessed by the agent and the project’s financial outcome. More precisely, we assume that when debt is the financing vehicle, the agent’s private information contributes to the project’s financial outcome by complementing only investment, which is chosen by the agent. By contrast, when FDI is the mode of finance, the private information of the agent is relevant to not only investment, but also effort, which is under the direct control of the investor. The institutional idea behind this assumption stems from the fact that the two modes of finance vest in the investor different levels of control and decision rights. While FDI is a particular way to finance investment through equity that allows the investor to make a direct contribution toward the production process, debt, by contrast, precludes any equity participation or the exercise of control rights on the part of the financier. Supporting this notion, Razin et al., (1996, p. 26, para 2) observes: “…… we look at FDI not just as a purchase of a sizable share in a company but, more importantly, as an actual exercise of control and management. (By contrast) the critical feature of foreign portfolio debt investment is the lack of control of the foreign investor over the management of the domestic firm, because of the absence of foreign managerial inputs.” Similarly, Schnitzer (2002, p. 43, para 4) articulates the difference between the two modes of finance thus: “[in] the case of debt finance ……, [the] host country owns and controls the investment project; [with] foreign direct investment,…… ownership and control of the project remains with the multinational.” In practice, the inputs supplied by the foreign investor under FDI can improve the project’s financial prospects by increasing the efficiency with which resources are utilized. For example, tighter control over the subsidiary may reduce perquisite consumption and other wasteful activities on the part of the agent; or the foreign investor may bring to bear scarce organizational and managerial skills. It is also reasonable to expect that such inputs will be more effective with greater firm productivity, reflecting the influence of productivity through its complementarities in the production process. In short, under debt finance, the agent’s private information operates through a ‘single channel’ since only the agent enjoys control and decision rights, whereas under FDI the agent’s private information works via ‘multiple channels,’ reflecting the fact that not just one, but all the parties directly control the project’s prospects. How, then, does this control-varying nature of the adverse selection problem affect optimal incentive provisions? We find that investment incentives are more pronounced under debt finance than under FDI. The logic is as follows. Under debt finance, because the agent and the foreign investor interact strictly at ‘arms length’ and any role played by the investor does not extend beyond providing capital, the optimal contract need only deal with the adverse selection and incentive provisions on the part of the agent. Not surprisingly, the result here parallels McAfee and McMillan (1991): the moral hazard problem is completely resolved, but the level of investment is intentionally distorted in order to limit the agent’s ability to command information rents. When FDI is the financing mechanism, however, then as posited above, the foreign investor supplies both capital and – by virtue of its equity interest – personally costly effort. Effort is valuable because it bolsters the project’s cash flows and thus the expected total surplus. At first glance, this might portend optimism. However, there is a flip side to this coin in that, due to the complementarity between the private information of the agent and the investor’s effort, the higher level of cash flows actually enhance private financial gains that accrue to the agent, thereby increasing the agent’s incentive to misrepresent its private information. In essence, FDI generates a much stronger ‘rent seeking’ incentive on the part of the agent than debt finance. Consequently, to induce truth telling, the agent must be afforded relatively higher rents under FDI. Since these rents are costly, the investor perceives the cost of implementing any given level of investment to be higher under FDI and therefore distorts investment incentives to a greater extent under this mode of financing. We should clarify here that no claim is being made that debt finance will always outperform FDI in terms of the optimal incentive provisions, but rather that it may occur under not implausible assumption concerning the interaction between the agent’s private information and the investor’s effort. It is this meshing between private information and effort, coupled with the critical need to communicate information, that causes the agency costs to be relatively higher under FDI. Of course, this is not the first paper to examine the relevance of international capital flows to environmental decisions. Abe and Zhao (2005) examine the welfare effects of emissions taxes under a choice between international joint venture and foreign direct investment. Rauser, 1995 and Rauser, 1997 examines the issue in the context of foreign direct investment only. Markusen et al., 1993 and Markusen et al., 1995, and Markusen (1997) explore the question of the extent to which plant location is influenced by differential environmental policies. Ulph and Valentini (1997) focus on agglomeration economies – which arise when firms from different sectors agglomerate in a single location – as a rationale for plant location and examine the extent to which environmental regulations can be manipulated to exploit these economies. The model presented here is substantially different – both in terms of set up and results – from these. First, environmental policy here is exogenous and its objective is different. In the studies cited above, domestic environmental policy is designed to affect either the firm's location decision or the mode of capital flow. In the current model, the environmental regulatory authority is not motivated by the firms’ location incentive, nor does it care about the mode of capital flow. Rather, its objective in implementing environmental policy is to create the proper incentive for environmentally benign production. The second difference has to do with the information structure. All the papers cited above abstract from asymmetric information. Our model adopts the “agency” view of the domestic firm, and therefore approaches the problem from an organizational point of view: the paper explores the linkage between financial arrangement and environmental quality in a framework that captures the agency relationship between a domestic firm and a foreign investor. Third, these papers are silent on the implication of the different forms of capital flows, preferring instead to focus on the importance of FDI. The ‘FDI versus debt’ comparison pursued in this paper recognizes that these flows are not monolithic. The present paper is similar in spirit to those studies that have examined the interaction between financial structure and economic behavior. Powered in part by the classic enquiry by Modigliani and Miller (1958), a number of papers have emerged to examine the implication of financial policy. Important contributions are Myers and Majluf, 1984 and Jensen and Meckling, 1976 and Ross (1977). Much of this theoretical literature has, however, restricted attention to the relationship between capital structure and the market value of the firm. Also closely related are studies that have examined the problem of international technology transfer. These include Choi (2001) and Tao et al. (1998) and Gallini and Wright (1990). Choi uses an incomplete contract model of the licensing relationship to explain the prevalence of royalty contracts. Tao and Wang focus on contractual joint ventures between multinationals and local firms in an environment characterized by weak enforcement of binding contracts. Although both studies employ the principal-agent framework, they assume away the crucially important role played by the productivity of technology recipient. In these studies, imperfect information result from hidden action (moral hazard) only. By contrast, this paper carries an EST flavour and is cast in an environment in which imperfect information comprises both moral hazard and hidden information. Gallini and Wright (1990) focus on licensing contracts for newly patented innovations when the licensor has private information about the economic value of the patent. One difference with this paper is that financial structure does not affect agency problems. The second difference relates to the structure of information asymmetry. While our model assumes that only the agent is the one endowed with a relevant private information, theirs is one of signalling by a privately informed principal in the spirit of Maskin and Tirole (1992) and Beaudry (1994). Other studies have examined various dimensions of debt and foreign direct investment as forms of international investment. Among the earliest papers here is Razin et al. (1996) who examine sources of market failure in the context of international capital flows. Their focus is on providing guidelines for efficient tax structure in the presence of market imperfection. Schnitzer (2002) considers the impact of sovereign risk on the structure of international capital flows. Neumann (2003) compares FDI with debt finance in a moral hazard environment in which information asymmetry is alleviated through costly monitoring. The author shows that when equity transmits information, FDI financing is preferred to debt finance because monitoring increases investment, output and consumption for the domestic firm. The rest of this chapter is structured as follows: The next section presents the basic elements of the model and develops the benchmark solution. Section 3 derives the solution to the investor’s problem and compares the two funding mechanisms. Section 4 discusses the results, while Section 5 concludes.

This paper has developed a screening model to illustrate the relationship between alternative forms of international private financing and the optimal investment in clean technology. The model is based on a simple asymmetric informational problem (comprising both adverse selection and moral hazard) between a domestic agent and a foreign investor. We have characterized the optimal level of investment under debt finance and foreign direct investment. Debt finance involves the supply of capital alone; consequently, all the informational problems occur on the part of the domestic agent. By contrast, FDI involves the supply of both capital, and organization and management skills. Thus, unlike previous modelling of capital flows that suppress asymmetric informational problems on the part of the investor, the optimal contract under FDI is structured to deal with both the agent’s information problems and the investor’s own incentive problems. Consistent with the canonical literature, we show that the first-best outcome of full information efficiency of investment and effort is generally not achievable when contracting takes place between parties that are asymmetrically informed about a relevant parameter. Under debt finance, the moral hazard problem is completely resolved, but investment is distorted away from its full information level due to the agent’s private information. By contrast, under FDI, the adverse selection persists and the moral hazard problem (on the part of the investor) is never eliminated. Hence, FDI amplifies the agency problem and results in more intense distortion of pollution control investment decisions. These results could be extended in a variety of ways. The model assumes that both the investor and the agent are risk neutral. Risk neutrality for the agent is questionable in this context, however, because agents are unlikely to possess a portfolio of similar projects spread across the developing world. Thus, a deeper exploration of the impact of financing mechanism might involve an examination of the effects of risk preferences. A second possible objection to this model is that it assumes that debt contract precludes the investor from exercising control over the firm. In reality, an investor may intervene even under a debt arrangement by threatening to terminate funding if the firm’s performance is not satisfactory. These lines of thought are beyond the scope of this study and are left for further research.