The Impact of Enterprise

Ownership on China’s
Environment

By Candace Williams
China in the News
Central Goal: Clean-up

I’m not dying of

cancer!
 • What are the costs of pollution?
• How do privately-owned
enterprises (POEs), state-owned
enterprises (SOEs), collectively-
Questions

owned enterprises (COEs), and

foreign firms contribute to
pollution?
• Are there specific strategies that
we can employ that address the
strengths and weaknesses of each
type of firm?
China’s Growth

GDP per capita from 1975 - 2002

China’s Growth
China’s Growth
 2001: the World Bank reported that 16 out of the
world’s 20 most-polluted cities are in China.
How Dangerous is
Pollution?

China loses 5.4% of its GDP ($160 billion)

per year because of environmental
degradation.
Air Pollution: Costs
1% of China’s city
560 million city-
dwellers breath air
considered safe by
the European
Union 760,000
PREMATUR
E DEATHS
Crop yields have
decreased by 30%
Air Pollution: Causes
Industry: 80%
Inefficiency
Energy-
intensive
Coal and Oil

Transportation
Boom:
14,000 new
cars each day
Water Pollution: Costs
More than 75% of water
that flows through faucets
is deemed unsuitable for
drinking or fishing

UNICEF says that 320 million

people lack access to clean
drinking water
 One-third of all
industrial wastewater
and two-thirds of
Water Pollution:

household sewage
remain untreated.
Causes

China’s industries
use 10 – 20% more
water than similar
industries in
developed nations
Political Costs

51,000 environment-related
protests in 2005
International Issues

Neighbors: 15% of sulfur deposits in South

Korea, and 50% of deposits in Japan, are
windblown from China.

Los Angeles: 25% particulate pollution

in the atmosphere over Los Angeles
originates in China
 State-Owned Enterprises
(SOEs)
Why does ownership
-Dropped from 80% share to
20% share in 30 years
-Inefficient
-Internalize national
matter?
Collectively-Owned
Enterprises (COEs)
-Small share of enterprises -
(decreasing)
-In a position to internalize
local externalities
-Slightly more efficient than

externalities
SOEs
-Bargaining power
-Local bargaining power
Privately-Owned Foreign Firms (FDIs)
Enterprises (POEs)
-Over 70% share today -41,485 new contracts in
(5.5 million) 2006 alone ($70 billion)
-No incentive to -Wholly-owned foreign
internalize externalities enterprises: 75%
-Strive for efficiency -Rest are joint ventures
-Least bargaining power -Race to the bottom vs. new
Why does ownership
matter?
 Wang and Jin
Why does ownership

(2002)
-Determinants:
ownership, factor
costs, pollution
matter?

abatement costs,
technology,
location, policy
variables,
community
variables, type of
industry
- Best to worst
performance:
FDIs, COEs, POEs,
Why does ownership
matter?
Is “race to the bottom”

• Pollution is not a large cost for

most private firms operating
abroad
wrong?

• There are community-level

penalties even if formal
regulations do not exist
• Abatement reduces costs:
pollution is an “unamarketed
production residual” resulting
from inefficiency

Dean, Lovely, and Wang (2005) and Wheeler (2001)

 COEs and Public Influence

Di and Wang (2002)

COEs and Public Influence
COEs and Public Influence
Reasoning behind GreenWatch:
• Firms may take initiative in regulating
themselves if they feel that it will help
them market their brand.
• The public expectation of ratings could
also provide an incentive for regulatory
institutions to keep accurately records
and disseminate information in a
timely matter.
• Other actors in the economy may exert
pressure over firms.
• Provides firms with an evaluation tool
and decreases the costs of monitoring.
Wang et al (2002)
COEs and Public Influence 11%
4%

Black
20% Blue
Hohhot Yellow
Red
1999 65%

Black
Hohhot Blue
Red
2000 Yellow

Wang et al (2002)
Lesson Learned: Power of the
Public
Lesson Learned: Efficiency

Barriers to
Efficiency:
- Subsidies
- Factor Prices
- Some
enterprises do
not have the
goal of
efficiency
 - Phase out subsidies

- Change prices
- Increase awareness
New Policies

- Provide more outlets for

public pressure