Introduction

Foreign direct investment has been studied for its impacts on development and its impacts on environment, but rarely for both at the same time. Despite an occasional nod to the environment, development scholarship as a whole tends to focus on economic goals—growth, industry upgrading or poverty alleviation. Environmental analysts, on the other hand, often take the economic benefits (or costs) of foreign direct investment (FDI) as a given and seek to uncover evidence of negative or positive externalities for the natural environment.

Using a case study methodology, this paper examines the impacts of FDI on sustainable industrial development—an integrated concept combining economic, environmental and social outcomes. We define sustainable industrial development as evolution along a three-dimensional path delineated by: (1) upgrading of the productive capacities of domestic firms; (2) employment creation, and (3) reduction of the ecological and health impacts of industrial growth and transformation.

For FDI to promote sustainable industrial development, transnational corporations (TNCs) must be linked to local firms, workers and consumers. In particular, they must generate—and host—country firms must absorb-two kinds of knowledge spillovers: technology and skills relevant to domestic industry upgrading and technology and management practices that reduce the ecological footprint of industry. A widespread and dynamic process of industry upgrading, in turn, generates high employment. Without spillovers, especially to local small- and medium-size firms (SMEs), the benefits of FDI tend to be narrowly concentrated in a few, usually urban, enclaves.