Regulating the Environmental Impact of Direct Investment in Developing Countries: The Need to Shift from a Command-and Control Mechanism to a Multi-stakeholder Approach

Abstract

Investment promotion occupies a prominent place in the development policies of developing and least developed countries. Yet it poses challenges to the achievement of sustainable development by undermining social development and exposing the environment to degradation. This article discusses the links between investment and the environment and the dilemma facing developing countries in their efforts to regulate the environmental impacts of investment more strictly. More specifically, it explains how countries‟ interest in remaining competitive in attracting investment affects the integrity of the environment. It also indicates a lack of institutional capacity to regulate investment, and the existence of a power imbalance between developing counties and companies (particularly multinationals) as factors jeopardizing the environment. It highlights the importance of effective policy measures to reap the benefits of investment and protect the environment at the same time. Finally, the article argues that countries need to introduce environmental regulatory systems that give room for different actors—governments, NGOs, the community, and business enterprises—to work together to control the environmental impacts of investment, presenting an alternative to the conventional command-and control approach. It elaborates how stakeholders‟ involvement, and specifically that of companies, is vital to ease developing countries‟ anxiety about losing the inflow of direct investment due to strict environmental regulation.