Chinese Business Review, ISSN 1537-1506 January 2011, Vol. 10, No. 1, 29-40

Foreign Direct Investments, Environmental Sustainability, and Strategic Planning: A Local Perspective

Pasquale Pazienza, Caterina De Lucia, Vincenzo Vecchione University of Foggia, Foggia, Elena Palma University of , Bari, Italy

The present work constitutes further explorations on Foreign Direct Investments (FDI) and environmental quality linkages and a starting point in the strategic planning process in the metropolitan area of Bari (the main province of the region in southern Italy) in the context of transfrontier commercial cooperation. A panel data analysis is used to show either the existence of the relationships across FDI, economic and environmental variables or their nature across provinces and time (fixed or random effect model). Model results suggest that diversification of policies across provinces would be more effective in the strategic planning process of a metropolitan city.

Keywords: FDI, strategic planning, environment, panel data

Introduction Over the last years, the increasing adoption of strategic planning processes in metropolitan urban contexts indicate that planning and public participation policy strategies are fundamental to sustainable practises to either re-qualify urban areas (i.e., Hamburg, Birmingham, Liverpool and Manchester) or re-launch international dynamic poles (i.e., Lion, Barcelona, Amsterdam and Turin). Evidence of these processes are also taking place in new EU countries (Karnitis & Kucinskis, 2009). The Metropolitan area of Bari, the main province in the Apulia region in Southern Italy, has recently adopted an urban strategic planning process to build a concrete project for regional development in 2015. This project aims at prioritise those actions which favour the interaction across a multitude of stakeholders and are strategic to boost development over 31 municipalities which constitute the metropolitan area of Bari. The need to expansion and requalification of the Metropolitan area of Bari and the development of Apulia region as a whole should be seen in the context of its geographical position which favours international transfrontier cooperation with Eastern European countries. The increased globalisation process across the Apulia region, its Metropolitan area of Bari and Eastern European countries is crucial to favour the enhancement of capital inflow and outflow and accelerate

Pasquale Pazienza, Ph.D., Department of Economics, Mathematics and Statistics, University of Foggia. Caterina De Lucia, Ph.D., Department of Economics, Mathematics and Statistics, University of Foggia. Vincenzo Vecchione, professor, Department of Economics, Mathematics and Statistics, University of Foggia. Elena Palma, Ph.D., Department of Geographical and Commodity Science, University of Bari.

29 30 FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY economic growth patterns according to sustainability and strategic planning visions. The present work analyses this framework as follows: Section 2 illustrates an overview of the Metropolitan Area of Bari; Section 3 focuses on the “openness” of a regional economic system to the trans-border commercial cooperation to investigate the impact of FDI with an eye to the main environmental quality issues in the province of Bari and Apulia region; Section 4 shows an empirical analysis across provinces and sectors to test the existence of relationships between environmental quality, FDI and economic growth in the Apulia region; and finally, section 5 discusses policy implications for the urban strategic planning process and concludes.

An Economic Overview of the Metropolitan Area of Bari in the Apulia Region The metropolitan area of Bari represents an area formed by 31 municipalities of the province of Bari. This area generates a value added of around 16 billion Euros derived mostly from the service (77.5%) and industry (19.7%) sectors. Agriculture contributes to the creation of value added in a small percentage (2.8%). As shown in Figure 1, most of the municipalities whose service sector performs at its highest contributes to the formation of their value added (60%-80%), a value which is higher than the national average.

Figure 1. Sectoral value added. Source: the authors’ elaboration on CCIA data, 2007.

The metropolitan area of Bari employs almost 90,000 workers across the 135,000 enterprises registered to the local Chamber of Commerce (Camera di Commercio, Industria, Artigianato e Agricoltura—CCIA). Most of the labour force is employed in the Industry and Commerce sectors (48%), with a minority in the Building, Agriculture and ICT sectors. Tradition and innovation or tradition within innovation is therefore considered the expression of the local economy. Figure 2 shows the composition of firms across municipalities of the metropolitan area of Bari. The area is characterised by a rural activity of its surroundings. The agro-industry districts of the area, with good export FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY 31 performances, agriculture employment and capacity of innovation are mainly developed around the municipalities of , Turi and . Local districts in terms of number of people employed are found across the municipalities of Bari, and , where the ASI Consortium, one of the most important industrial parks of the Adriatic Sea Region, is located. Furthermore, most of medium-sized enterprises are situated in the municipalities of Bari, and Valenzano which are specialised predominantly in the ICT sector. This, together with the Mechanics sector, has been particularly vital over the last decade to the industrial development of the metropolitan area of Bari in terms of export performance and innovation capacity. Tourism, a growing sector with great opportunities to attract foreign capital, is instead active across the municipalities of Bari, and .

Figure 2. Sectoral number of firms across municipalities in the metropolitan area of Bari. Source: the authors’ elaboration on CCIA data, 2007.

These are the main attraction poles in the Metropolitan Area of Bari for providing recreative activities. The service sector (i.e., commerce, marketing and distribution) mostly related to wholesale businesses, as well as Food and Flower commodity industries are also vigorous across the entire metropolitan area, although their export performances strongly depend to business cycle trends. Finally, energy sector is expanding over the last years due to regional investments in the eco-building sector. The emerging local economic system encounters various problems to be fully structured in the regional context. Firstly, the loss of the entire value chain within the regional territory; Secondly, the lack of local and/or international collaboration, innovation and internationalisation, mainly due to the presence of few large enterprises and a multitude of small-sized firms. To overcome these problems, the Apulia region has promoted, by means of the Regional Law 23/2007, the creation of regional industrial districts whose processes and implications for the local economy are still in progress.

32 FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY

Transfrontier Commercial Cooperation in the Metropolitan Area of Bari The last Italian Economic Census in 2001 showed a clear improvement of the economic performance (in terms of workers and added value) of the Adriatic Sea Regions of Italy with respect to the Tyrrhenian Sea ones over the last ten years. Import-export performance of the metropolitan area of Bari has recorded a surplus of the balance of payment mainly due to exports of Food, Mechanic and “other industries” commodities. For this reason, the province of Bari is ranked 29th across 113 Italian provinces (including Valle D’Aosta region which does not have any province) for the value of its exports (3 billion Euros in 2007). Albania, Greece and Montenegro represent the most important commercial partners for the metropolitan area of Bari even though Albania is the largest area devoted to exporting commodities. The metropolitan area of Bari is leader in the Apulia region for the attraction of net FDI. However, the “empowerment” of the metropolitan area and the Apulia region towards sustainability issues suggests that certain links may be created between FDI and environmental quality. These links would in turn affect the strategic choices of policy makers when implementing a planning process. The quantitative analysis conducted in the next sections, involves therefore the study of the relationships between FDI, economic growth (GDP) and environmental quality. Overview of FDI, Economic Growth and Environmental Linkages The debate over FDI, economic growth and environment issues is relatively new. Many studies focus their attention on the cause-effect nexus of stringent environmental policies on firm’s competitiveness as migration from/attraction to a given location. “Theoretically, a process of arbitrage (factor price equalisation) drives up emissions in countries with more abundant environmental resources and lower pollution regulation, to the point where industries migrate, and drive down emissions in those countries that lose their industries. Comparative advantages may therefore be seen as pollution haven and industry flight hypothesis” (De Lucia, 2007). A further aspect to consider is the link between FDI and pollution. Most of the literature concerned with this issue is born under the Environmental Kuznets Curve (EKC) hypothesis. The EKC became famous because of its similarity to the inverted U-shaped relationship between inequality and income levels advanced by Simon Kuznets (1955). The EKC hypothesis purposes an inverted U-shaped between various indicators of environmental degradation and per capita income. This implies that “one country’s economic growth will redress the environmental impacts of the early stages of economic development and that growth and technological progress will lead to improve environmental performances in the developed countries” (De Lucia, 2002). EKC studies have captured the international community’s attention given the increasing interest in the economic growth, trade and environmental quality. The debate is still on-going. FDI are seen as depending on in the income effect (one country’s preferences for the environment) and the scale effect (improvements in the environmental variable as GDP increases) of the host region. However, once foreign capitals enter the host region, these can certainly have effects on the EKC’s characteristics. FDI could accelerate economic growth (Li, Liu, & Parker, 2001; Chen & Demurger, 2002; Liu & Wang, 2003; Tvaronavičius & Tvaronavičiene, 2008) or provide technology improvements and therefore advance income effects (Thompson, 2002; Lemoine & Ünal-Kesenci, 2004). These would in turn affect and reinforce the decision making process towards sustainability issues. FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY 33

FDI: Some Descriptive Statistics Issues for Apulia Region and the Metropolitan Area of Bari Figure 3 illustrates the inflow and outflow of firms in the Apulia region over the period 1988-2000. Computations are based on the Italian National Institute of Statistics (ISTAT) data. Although a positive trend can be drawn from both inflow and outflow of firms, a massive increase of firms outflow rates is present. While at the end of 1980s until mid 1990s a net inflow of firms prevails, from 1996 to 2000 a net outflow of just about 3 firms occurs in Apulia region.

Figure 3. Inflow and outflow of foreign firms in Apulia. Source: the authors’ elaborations on ISTAT data, 1988-2000.

The trend arguably follows the economic business cycle during those years. At the beginning of the 1980s, the enhancement of the ICT and tertiary sector worldwide provided a rapid increase of new industries in which the Apulia Region benefitted until mid 1990s. Once the international business cycle reached its peak during the 1990s, the existence of negative expectations and structural problems (Pazienza & Vecchione, 2008) favoured the increase of foreign firms outflow from the Apulian territory.

Figure 4. Inflow and outflow of foreign turnover in Apulia region. Source: the authors’ elaborations on ISTAT data, 1988-2000.

Figure 4 shows the turnover of foreign firms. The turnover inflow remained almost below 1,000 billion Euros until mid 1990s to jump at a peak of more than 5,000 billion Euros in 1998-1999. During those years, 34 FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY in fact, massive investments in the industrial sectors took place (ICE, 1999). The firms’ turnover outflow, on the other hand, was of just about 50 million Euros over the same time span. The description now turns to briefly analyse the trend in FDI in Apulia region and the metropolitan area of Bari. Figure 5 illustrates FDI in Apulia region during the time period 1999-2005. During these years, an increasing trend in foreign inflow and outflow of investments in the Apulia region is present. Both flows reach peak values in 2005. Many reasons can be adopted to explain such phenomenon. One of the most apparent is the effect of the European Union Structural Funds system of which Apulia Region benefits. This would favour higher business climate expectations foreign and home firms.

Apulian inflow

Foreign inflow

Apulian outflow

Foreign outflow

Figure 5. FDI in Apulia region. Source: the authors’ elaborations on ICE data, 1999-2005.

In the metropolitan area of Bari a similar trend is also evident (see Figure 6). Capital outflow is massive (64 billion Euros) at the beginning of the time span considered to stabilise (not above 2 billion Euros) by the end of the same period. Capital inflow assumes, on the other hand, a weak increasing trend over time.

Capital inflow

Capital outflow

Figure 6. FDI in the metropolitan area of Bari. Source: the authors’ elaborations on ICE data, 1999-2005.

Environmental Quality: Issues for Apulia Region and the Metropolitan Area of Bari In this section, a description of air quality levels and regulation issues for Apulia region and the metropolitan area of Bari are presented. Italy, as other European countries, has recently adopted various FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY 35 international regulations to combat global problems such as the Kyoto Protocol, the Montreal Protocol, the European Air Quality Directives for long range transboundary flux emissions, or the latest renewable energy policy adopted by the European Council in March 2007 (the so-called 20-20-20 CO2 policy target) to cite a few. This picture allows urban centres to treat environmental pollution as an emergency problem to face under various aspects (i.e., health, sanitary, etc.). In fact, atmospheric pollution is one of those factors that most affect human health for increasing respiratory diseases. Increasing and efficient monitoring at both national and regional level has therefore taken place. Figure 7 shows air quality monitoring in Apulia. The Apulian Environmental Protection Agency (Agenzia Regionale per la Protezione Ambientale—ARPA) monitors daily emissions of various pollutants, such as SO2, PM10, NO2, CO, O3 and benzene. In the latest report on air quality (Agenzia Regionale per la Protezione Ambientale ARPA 2008) for the metropolitan area of Bari it argued that PM10 concentrations have exceeded the daily standards, whereas all other pollutant concentrations remained below limit values. Monitoring of main air pollutants mainly occurs nearby urban centres (see Figure 7). This is particularly true for all provinces except for Foggia, where monitoring stations are instead situated on the east side coast around the Manfredonia area.

Figure 7. Air quality monitoring in Apulia region. Source: Apulian environmental protection agency.

Furthermore, a massive monitoring is carried out, compared to other provinces, in the Taranto and Brindisi areas. It is reasonable to believe that in these industrial districts, where pollution levels are at their highest, a ponderous monitoring should be carried out. The need for increasing monitoring would also favour the adoption of environmental inventories for which Apulia still lacks. With the project SPIN-ECO, the province of Siena (in Northern Italy) jointly with its university and municipality (Provincia of Siena, 2001; Pulselli, Ciampalini, Leipert, & Tiezzi, 2008), provided the first dynamic analysis on sustainability to evaluate emergy balances, the absorption capacity of the natural environment, the regional economics and environmental vulnerability and mitigation strategies through adaptation plans. The first attempt to construct an Italian emission inventory disaggregated at Nomenclature of Territorial Units (NUTS) 3 (provinces) and sectoral levels was published in 1995 by Laurentis, Gaudioso and Liburdi (1995) for 1990 data. Since then, no study updated the CORINAIR emission inventory. Figure 8 and Figure 9 illustrate SO2 and NOX 36 FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY emissions across economic activities in the metropolitan area of Bari in 1990. These pollutants present the characteristics to be both local and transboundary in nature. The effects on human health are mostly the same although their origin differs across economic sectors. An effective environmental regulation at sectoral level is therefore auspicable to attain an efficient strategic planning. In Figure 8, more than a quarter of SO2 emissions originate from road traffic whereas almost less than a quarter has its source in the cement industry.

Major sources for NOX emissions (road traffic and cement industry in Figure 9) are similar to those for SO2. Power generators in the industry and tertiary sectors are instead considered minor polluting sources.

Figure 8. Sectoral SO2 emissions in the metropolitan area of Bari in 1990. Source: the authors’ elaborations on De Laurentis et al. (1995) data.

Figure 9. Sectoral NOX emissions in the metropolitan area of Bari in 1990. Source: the authors’ elaborations on De LAurentis et al. (1995) data. FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY 37

Empirical Analysis: FDI, GDP and Environmental Quality Interactions In this section, an empirical analysis is carried out to study the relationships occurring between FDI and environmental quality. In particular, the section aims to focus on the effects of FDI on environment. The methodology carried out is a panel data analysis across the five provinces of the Apulia region, and across sectors types such as: Agriculture, Energy Intensive and Bricks Industry, Other Industry, Services and Transports. The time period considered is from 1999 to 2005. Environmental quality in this case study is observed in terms of SO2 and NOX emissions. Data Sources The main dataset employed for this study consists of net fluxes of FDI in the five provinces at sectoral level taken from the Institute for Foreign Commerce (Istituto per il Commercio Estero, ICE). Sectoral Value Added (VA) is used as a proxy for GDP for each province. The dataset is available on line at the Italian Institute of Statistics (Istituto Nazionale di Statistica, ISTAT) for the years 1999-2003. For the years 2004 and 2005, an average of value added across relevant sectors and years has been considered. Given the lack of an emission inventory for the Apulia Region disaggregated by sectors, estimates of sectoral emissions have been obtained by projections of the De Laurentis et al. (1995) inventory based on 1990 data. Emissions projections have been obtained considering the direct relationship existing between diffuse pollution and GDP (Perman, Ma, McGilvray, & Common, 2003), where pollution is obtained by multiplying GDP by an emission factor (of the given pollutant under consideration). Proxy values for emission factors have been obtained from the International Institute for Applied System Analysis, IIASA (1998).

Panel Data Model and Results “Panel data analysis endows regression analysis with both a spatial and temporal dimension. The spatial dimension pertains to a set of cross-sectional units of observation” (Yaffe, 2003), whereas the temporal dimension is characterised by various temporal sources such a as years, months or daily observations. The bi-dimensionality therefore is characterised by a cross sections of observations of sectors and provinces and the temporal reference is the time period 1999-2005. The relationships to be estimated can be expressed with the following equations:

SO2it = α i + β1FDI 1it + β 2VA2it + ε it (1) NO = α + β FDI + β VA + ε (2) X it i 1 1it 2 2it it where SO2 and NOX are the pollutants (dependent variables), FDI is the net flux of foreign direct investment and VA represents the sectoral value added. Predictions for the models expressed in equation (1) and equation (2) can be summarised as follows: ∂SO ∂NO ∂SO ∂NO 2it < 0; Xit < 0; 2it > 0; Xit > 0 ∂FDI it ∂FDI it ∂VA it ∂VA it The presence of FDI in the Apulia region across sectors and provinces would favour investments in greener technology. This would provide to decrease emissions levels; on the other hand, increasing emission effects is instead captured by the value added (Perman, 2006). Furthermore, all variables have been transformed in per-capita terms to captures the local nature of these pollutants (the case study does not consider the transboundary nature of SO2 and NOX). Table 1 and Table 2 show the estimate results for SO2 and NOX. 38 FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY

Estimates results for both SO2 and NOX panel data regressions indicate that a negative relationship exists between FDI and emissions levels. In particular, one million Euro increase of net FDI flux in the five sectors across Apulian provinces would cause a decrease of 0.06 thousand tonnes of SO2 and 0.07 thousand tonnes of NOX. This result is statistically consistent for the NOX estimates at 95% confidence interval. Predictions for the value added in both cases are assumed to be true given the positive signs of the value added coefficients. In the case of SO2 panel data analysis, one million Euro increase in the value added would increase SO2 emissions by 0.46 thousand tonnes; whereas NOX emissions would be instead subject to an increase of 3.5 thousand tonnes. Both value added coefficients are statistically significant at the 95% Confidence Interval. R2 in both cases is relatively low. In other words, the independent variables considered in the equations are able to explain 29% and 24% of the SO2 and NOX panels estimates, respectively. It can be argued that given the uncertainties linked to the study of environmental quality itself this can be explained by a number of factors. This is surely beyond the scope of this paper. A Hausman diagnostic test has been also carried out to test the validity of a RE model against the FE. The null hypothesis (that the RE model is consistent) cannot be rejected at 95% confidence intervals in both models. Therefore, the sectoral and provincial individual effects do not appear to be correlated with the regressors (Baum, 2006).

Table 1 Panel Data Estimates for SO2 Variable Coeff. St. Err Z P>¦Z¦ FDI -0.06 0.04 -1.24 0.21 VA 0.46 0.06 8.22 0.00 Const 4.11 1.41 2.92 0.00 R2 0.29 Wald 0.00 Obs 175 Hausman Prob>Chi2 0.78

Table 2 Panel Data Estimates for NOX Variable Coeff. St. Err Z P>¦Z¦ FDI -0.07 0.40 -1.73 0.08 VA 3.50 0.49 7.08 0.00 Const 6.75 12.34 0.55 0.58 R2 0.24 Wald 0.00 Obs 175 Hausman Prob > Chi2 0.84

Discussion and Concluding Remarks The results obtained in the previous section can be used to formulate optimal policies in term of planning strategies. The relationship between FDI and environment is plain: The presence of FDI in the FOREIGN DIRECT INVESTMENTS, ENVIRONMENTAL SUSTAINABILITY 39

Apulian region across sectors and provinces would favour investments in greener technology. This would provide a decrease trends in emissions levels, counterbalanced by value added effects. To favour a substantial rise of net FDI inflow in the Apulian region, policy makers should address improvements of the monitoring system for environmental quality. This would particularly be realistic for urban areas and industrial settlements. As described in section 2, in fact, the increasing monitoring would also favour the adoption of environmental emission inventories for which Apulia still lacks. Furthermore, given that pollution sources vary across provinces, it is advisable that planning methods and strategies differ accordingly such that the territorial context and environmental quality are taken into account in a more efficient way. Differences also exist across economic sectors within the same province. Adequate policies would positively affect FDI and sustainability issues if these were addressed for each specific economic activity. For the metropolitan area of Bari, the strategic planning process play a great role in context of trade, FDI and environment relationships. Policy decisions should be addressed to consider their impact on the environment of the strategy planning as a whole (i.e., different actions to be taken within the economic, transport, and environmental systems). The actual strategic planning process is already directed towards this direction. The promotion of the railway and the public transport systems, as well as the support to “green” firms are examples of policies converging to the reduction of pollution and attraction and/or creation of new investments.

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