Journal of Cleaner Production 265 (2020) 121914

Contents lists available at ScienceDirect

Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Home governments facilitate cleaner operations of outward foreign

direct investment: A case study of a cleaner production partnership
programme
Yuanqi Jiao a, Chuanwei Ji a, Shuyan Yang b, Guojun Yang a, Meirong Su c, *, Hongbo Fan a
a
Dongguan Cleaner Production Center, School of Environment and Civil Engineering, Dongguan University of Technology, Dongguan, 523808, PR China
b
School of Materials Science and Engineering, Dongguan University of Technology, Dongguan, 523808, PR China
c
Research Center for Eco-Environmental Engineering, Dongguan University of Technology, Dongguan, 523808, PR China

a r t i c l e i n f o a b s t r a c t

Article history: Whether foreign direct investment (FDI) damages the environment in host regions is an important
Received 29 June 2019 question for both scholars and policy-makers. To examine the impact of FDI on a host region, Hong Kong-
Received in revised form owned factories were selected as the providers of FDI and Guangdong was selected as the host region.
9 April 2020
The background, incentives, detailed implementation, and outcomes of the Hong Kong Guangdong
Accepted 25 April 2020
Available online 30 April 2020
Cleaner Production Partnership Programme (CP3), a positive intervention by the home government
(Hong Kong) using FDI to disseminate cleaner technologies for abating pollution in the host region
Handling Editor: Charbel Jose Chiappetta (Guangdong), were comprehensively analyzed in this study. The successful implementation of the Hong
Jabbour Kong Guangdong CP3 indicates that home governments can positively improve the environmental
performance of FDI and make it cleaner. The spillover effects of cleaner technology dissemination from
Keywords: Hong Kong-owned factories benefit locally owned factories in related industries via different approaches.
Foreign direct investment More importantly, the Hong Kong Guangdong CP3 aims to achieve cleaner production in various in-
Hong Kong Guangdong cleaner production dustries, thereby creating a cleaner supply chain. Hence, a cleaner operations mechanism was gradually
partnership programme
formed through the combined efforts of Hong Kong and Guangdong. Moreover, the reasons for the
Hong Kong-Owned factories
success of the Hong Kong Guangdong CP3 were identified, and can be referred to by other regions. This
Technology dissemination
Cleaner supply chain study provides direct evidence to support pollution halo hypothesis that FDI from developed regions can
Cleaner operations mechanism promote cleaner development of host regions (developing regions) via a cleaner operations mechanism
rather than heavily pollute host regions.
© 2020 Elsevier Ltd. All rights reserved.

1. Introduction opportunity to gain access to a different business environment

In the era of globalization, foreign direct investment (FDI) is
important for both developing and developed countries. For host
countries, FDI is a valuable source of tax revenues, which can be
used to improve infrastructure and create job opportunities. More
importantly, FDI is a key means of absorbing advanced technologies
and management experience, thereby enhancing productivity
(Glass and Saggi, 2010). FDI brings these benefits to host countries
through resource-transfer effects, employment effects, balance-of-
payments effects, and effects on competition and economic growth
(Hill and Hult, 2016). For home countries, FDI provides an
* Corresponding author.
E-mail address: sumr@dgut.edu.cn (M. Su).
including factors such as large markets, a ready supply of resources,
cheap labor, and tax concessions (Padilla-Perez and Nogueira,
2016). FDI provides firms with a quick and low-risk means of en-
try to emerging markets by better combining their existing ad-
vantages (e.g., advanced technology and/or management skills and
low-cost production) with local advantages offered by the host
country (e.g., cheap labor, and abundant energy or raw materials).
Meanwhile, host countries can benefit from an improved balance of
payments, increased employment opportunities, and transfer of
valuable skills (Hill and Hult, 2016).
However, FDI can also facilitate the transfer of old and inefficient
equipment and perpetuate heavy polluting industries that damage
the environment in the host countries (Kinoshita and Campos,
2003). This form of FDI has been found to be a response to
various institutional constraints of the home country (Witt and

https://doi.org/10.1016/j.jclepro.2020.121914
0959-6526/© 2020 Elsevier Ltd. All rights reserved.
2 Y. Jiao et al. / Journal of Cleaner Production 265 (2020) 121914
Lewin, 2007), with a lot of FDI focused more on the interests of the
home country than on the environmental quality of the host
country (Walter and Ugelow, 1979). Several host countries have
found that economic growth has come at the expense of severe
environmental pollution, such as enormous amounts of waste-
water, dust, air pollution, and solid waste, and some of these
countries have attributed the deterioration of the environment to
“dirty” FDI (He, 2006). Traditionally, home countries prefer to target
countries with lax environmental policies when considering FDI.
Thus, these host countries have become pollution havens for home
countries in terms of FDI (Cole and Elliott, 2005; Rubashkina et al.,
2015). However, other studies have found evidence that FDI can
improve environmental quality (Zhang and Zhou, 2016) and pro-
mote sustainable development (Aust et al., 2020) in a host country.
To empirically examine this important issue (Millimet and List,
2004; Shapiro, 2014), we use Guangdong and Hong Kong as the
host and home regions, respectively, to analyze the impact of FDI on
environmental quality in Guangdong. Although FDI from Hong
Kong is classified in a distinctive category as non-foreign invest-
ment (China Plus, 2019), Hong Kong-owned factories were still
selected as the proxy of FDI because FDI from Hong Kong are
managed in reference to foreign investment, collected as foreign
investment in the Statistical Yearbook, and constituted the largest
proportion of FDI in Guangdong. Guangdong was selected as the
host region because it attracts the most FDI among all of the
provinces in China. The Hong Kong Guangdong Cleaner Produc-
tion Partnership Programme (CP3), which was introduced in
response to the influx of FDI into Guangdong, is analyzed, the
reasons for the success of the CP3 are identified, and the theoretical
and empirical implications of the CP3 are discussed.
The rest of this paper is organized as follows. Section 2 reviews
the literature regarding the correlation between FDI and environ-
mental quality in host countries at different scales. Section 3 de-
scribes the methodology. Section 4 introduces the background,
detailed implementation, and outcomes of the CP3. Section 5 pre-
sents the results and discussion, and Section 6 presents concluding
comments.
2. Literature review
In environmental economics, the correlation between FDI and
environmental quality in the host country has been a controversial
topic since the 1990s (Birdsall and Wheeler, 1993; Copeland and
Taylor, 1994), and remains ambiguous (Millimet and List, 2004)
and inconclusive (Shapiro, 2014) as a result of unobserved het-
erogeneity and endogeneity when the issue is examined at various
scales.
At the international scale, the high level of unobserved cross-
country heterogeneity has meant that the FDIeenvironmental
quality nexus is unable to be determined (Lundh, 2017). Various
studies have found the relationship between FDI and pollution
emissions in host countries to be both positive (Zakarya et al., 2015)
and negative (Lo
pez et al., 2018; Shahbaz et al., 2019; Xie et al.,
2020), to exhibit either bidirectional causality (Omri et al., 2014;
Pao and Tsai, 2011) or unidirectional causality (Abdouli and
Hammami, 2017), or to remain undetermined (Blanco et al.,
2013). The impact of FDI on environmental quality is not easily
isolated (Aliyu, 2005) from the numerous factors that cause envi-
ronmental degradation, such as the host country’s energy con-
sumption (Zakarya et al., 2015), degree of urbanization, trade
openness, and industrial development (Zakarya et al., 2015;
Tamazian et al., 2009), political stability (Al-Mulali and Ozturk,
2015), corruptibility (Cole et al., 2006), institutional quality
(Tamazian and Rao, 2010), development level (Hoffmann et al.,
2005), population density (Chang and Huang, 2015; Chang and Li,
2019), and income level (Baek and Choi, 2017; Holtz-Eakin and
Selden, 1995).
At the national scale, the FDIeenvironmental quality nexus
also remains inconclusive. For example, the impact of FDI on
environmental quality has been found to be very small (He, 2006;
Sun et al., 2017), strongly negative (Wang and Chen, 2014; Baek and
Koo, 2009), weakly negative (Zomorrodi and Zhou, 2017), statisti-
cally significantly negative (Cole et al., 2011), positive (Hao and Liu,
2015), or dependent on the level of human capital (Lan et al., 2012)
or pollutants (Liu et al., 2018). However, other studies have found
evidence that FDI reduces pollution (Zhang and Zhou, 2016;
Kirkulak et al., 2011), improves air quality (Jiang et al., 2018; Liang,
2006), induces energy intensity convergence (Li et al., 2019; Zhao
et al., 2019), and stimulates innovation (Jaffe et al., 1995). In
terms of regional heterogeneity, foreign investment curbs carbon
emissions in the eastern and central regions but causes the oppo-
site effect on the western regions of China (Zhang et al., 2020). In
India, FDI was found to increase CO2 emissions (Acharyya, 2009)
and have a detrimental effect on environmental quality in both the
short term (Jungho and Koo, 2009; Baek and Koo, 2009) and the
long term (Jungho and Koo, 2009), while bidirectional causality
between FDI and CO2 emissions was identified in Vietnam (Tang
and Tan, 2015).
At the industry scale, numerous industry characteristics are not
controlled for in empirical analyses, producing biased results
(Levinson and Taylor, 2008). Heavy polluting industries (Yang et al.,
2018), such as chemical industries (Xing and Kolstad, 2002;
Castelein, 2018), and industries with high pollution abatement
costs (Spatareanu, 2007) show a positive correlation between FDI
and pollution (Waldkirch and Gopinath, 2008). Meanwhile, the
correlation is not very strong (Castelein, 2018) in less-polluting
industries (Xing and Kolstad, 2002).
At the firm scale, the effect of FDI on environmental quality of
host countries tend to be positive. In the coal-fired power gener-
ating sector, foreign ownership promotes the cleaner production
(Huang et al., 2019). Cross-border environment management of
parent company can more obviously benefit the environment than
local environmental regulation (Jin et al., 2019) and generates
positive spillovers (Melane-Lavado et al., 2018).
In summary, the unclear relationship between FDI and envi-
ronmental quality in host countries at three different scales has led
to confusion among policy-makers and scholars. While robust
proofs have been presented in the literature, this does not mean
that the impact of FDI on environmental quality in host countries is
conclusive because of problems with unobserved heterogeneity
and endogeneity. Many studies deduced their results from the
theoretical model, such as ordered probit model (Aust et al., 2020),
Generalized method of moments (Shahbaz et al., 2019), regression
model (Xie et al., 2020; Zhang et al., 2020), differences-in-
differences (Huang et al., 2019), structural equation model (Jin
et al., 2019), a binary logit model (Melane-Lavado et al., 2018),
Markov Chain approach (Li et al., 2019), b convergence model (Zhao
et al., 2019). Previous studies have neglected the role of home
governments in regulating, controlling, and supervising the envi-
ronmental effects of FDI in the host regions. Thus, we analyze the
effect of FDI on environmental quality in the host region from an
empirical perspective, including the involvement of the home
government, by studying the impact of Hong Kong-owned factories
on Guangdong under the CP3.
3. Research methodology
The case study method is widely used in the environmental
sciences (Testa et al., 2012). This method helps to inform practice by
illustrating what has worked well and what has been achieved. It is
 Y. Jiao et al. / Journal of Cleaner Production 265 (2020) 121914
common for multiple sources of evidence to be used (Yin, 2009).
Numerous scholars have attempted to identify the correlation be-
tween FDI and environmental quality from a theoretical perspec-
tive (Aliyu, 2005), and various hypotheses have been proposed,
such as the pollution haven hypothesis (Aliyu, 2005). However, the
correlation remains ambiguous, and findings are often contradic-
tory (Birdsall and Wheeler, 1993; Copeland and Taylor, 1994). The
main reasons for the complex and uncertain impacts of FDI on host
regions are unobserved heterogeneity at the international, national,
and industry scales, and the endogenous impacts of environmental
regulations, FDI, and environmental performance, as discussed in
the literature review. It is difficult to identify the contribution of a
single factor affecting environmental quality, and thus to confirm
the net impact of FDI. Under this context, it is really valuable to
provide some empirical experiences to uncover the complex rela-
tionship because an inductive case may refresh the theory building
research (Perry, 1998).
4. Implementation and outcomes of the Hong
Kong¡Guangdong CP3
4.1. Background to implementing the CP3
4.1.1. Transboundary air pollution in Hong Kong and Guangdong
High emission levels from a wide range of anthropogenic and
natural sources have caused severe air pollution in the Pearl River
Delta Region (PRDR). This air pollution is compounded by the high
oxidation potential of the atmosphere, creating high concentrations
of primary and secondary pollutants including SO2, nitrogen oxides
(NOx), volatile organic compounds (VOCs), ozone (O3), and partic-
ulate matter (PM). In 1997, total air pollution reached a critical level.
Table 1 shows the total pollutants in the Hong Kong Special
Administrative Region (HKSAR) and the PRDR in 1997. Although the
pollution emissions in the PRDR were much greater than those in
the HKSAR, the HKSAR experienced more environmental pollution
than Guangdong because of its smaller physical and ecological area.
It can be seen that power plants and industrial facilities in the Pearl
River Delta economic zone (PRDEZ) and power plants in the HKSAR
were the main sources of air pollution. Because of the high levels of
emissions and transboundary air pollution, the HKSAR experienced
fewer than 50 days annually between 1997 and 2003 when the air
quality was rated as good.
4.1.2. Pressure from pollution reduction plans
In 2002, emissions reduction targets were set, i.e., the annual
average concentrations of SO2, NOx, respirable suspended particles
(RSP) and VOCs in the PRDR in 2010 dropped by 40 per cent, 20 per
cent, 55 per cent and 55 per cent, respectively, compared with that
in 1997.
4.2. CP3 framework
4.2.1. Funding
After the successful implementation of a clean production (CP)
technical support pilot project, the Environment Bureau of Hong Kong
Table 1
Regional distribution of pollutants in 1997 (tons).
Pollutants SO2 NOx PM10
HKSAR 65.9 123.3 11.4
PRDR 732.5 632.9 519.5
Data source: The Special Panel of the PRDR Air Quality Management, available at
https://www.legco.gov.hk/yr07-08/chinese/panels/ea/papers/ea0128cb1-666-4-ec.
pdf
3
collaborated with the Economic & Information Technology Com-
mission of Guangdong and the major trade and industry associations
in the HKSAR to launch a five-year CP3 in 2008. The funding for the
CP3 is outlined in Fig. 1, and the associated Hong Kong Guangdong
CP Partners Recognition Scheme is shown in Fig. 2. Under this pro-
gram, professional advice and technical support are provided to
encourage Hong Kong-owned factories in the PRDR to adopt CP
technologies and practices, thereby contributing to improved air
quality and the overall quality of the regional environment.
4.2.2. Target industry sectors and objectives
The CP3 targets the majority of industry sectors, which includes
most firms in the PRDR that use production processes resulting in
substantial emissions of air pollutants and/or large quantities of
potentially environmentally damaging chemicals or materials, or
consume large quantities of fuel and energy (see Fig. 3).
The CP3 is focused on the reduction of pollution generated by
industrial facilities in the PRDR. It aims to encourage Hong Kong-
owned factories in Hong Kong or Guangdong to adopt CP tech-
nologies and practices, thereby contributing to a cleaner environ-
ment by reducing pollutant emissions, improving energy efficiency,
reducing and controlling effluent discharges, and reducing pro-
duction costs.
4.2.3. Technology supply
The technology provided to Hong Kong-owned factories, which
corresponds with set objectives, is shown in Fig. 4. This technology
is embedded in CP3-supported projects including on-site
improvement assessment projects, demonstration projects, and
organizational support initiatives. In the new phase of CP3, VOCs-
and NOx-reduction technologies are encouraged, and the program
has been extended to cover the entire province of Guangdong.
4.2.4. The Hong KongeGuangdong CP Partners Recognition Scheme
To further galvanize efforts to promote CP, the Hong Kong and
Guangdong governments jointly launched the Hong Konge
Guangdong CP Partners Recognition Scheme in 2009 to award com-
mendations to those Hong Kong-owned enterprises that had
demonstrated their active participation in CP. The Hong
KongeGuangdong CP Partners Recognition Scheme is summarized in
Fig. 5.
VOCs
68.9
400.9
Fig. 1. Hong Kong Guangdong CP3 funding.
4 Y. Jiao et al. / Journal of Cleaner Production 265 (2020) 121914

Fig. 2. Funding for the Hong KongeGuangdong CP partners recognition scheme.

Fig. 3. Industries targeted by the CP3.

Fig. 4. Technology supply in the CP3.

4.3. Achievements of the CP3
4.3.1. Completed projects
Table 2 shows the projects funded by the CP3. It can be seen that
more than half of the projects focused on on-site improvement
assessments. Additionally, 435 technique-extension and technique-
transfer activities were organized, and 37,353 people attended
these CP-promoting and CP-adopting activities, which facilitated
the dissemination of new technology to local factories. These
completed projects help factories to conserve much energy and
material, and reduce pollution emission. For example, in a
demonstration project (No.08D0024) implemented in C & C Joint
Printing Co., (Guangdong) Ltd, waterborne lamination replaced
solvent borne lamination, can save 281thousand USD per year and
reduce VOCs emission 66 ton per year (Hong Kong Productivity
Council, 2019). The results of emission reduction were presented
in Table 3. There was a significant decrease of emission in both
PRDRZ and HKSAR. We admit that the achievement is a mixture of
multiple efforts of Hong Kong and Guangdong Province. Anyway, a
part of emission reduction achievement can be attributed to CP3.
4.3.2. Cleaner technology acquisition and rewards for Hong Kong-
owned factories
Many energy-saving technologies, air pollution-reduction
technologies, and effluent discharge-reduction technologies have
been adopted by Hong Kong-owned enterprises in the PRDR (see
 Y. Jiao et al. / Journal of Cleaner Production 265 (2020) 121914 5

Fig. 5. The Hong KongeGuangdong CP partners recognition scheme.

Table 2
Projects funded under the CP3.

Funding projects Approved

On-site improvement assessments 1567

Demonstrations 309
Verification 849
Total 2725
Technique-extension and -transfer events 435 and 37,353 attended the events

Table 3
Emission reduction target and achievement in 2010a (as compared with 1997).

Pollutant Area 2010 emission reduction targets 2010 emission reduction

Achievement

SO2 HKSAR 40% 57%

PRDEZ 40% 45%
NOx HKSAR 20% 30%
PRDEZ 20% 20%
RSP HKSAR 55% 59%
PRDEZ 55% 59%
VOCs HKSAR 55% 59%
PRDEZ 55% 26%
a
Sources: Special Panel of the PRDR Air Quality Management and Monitoring, Report of the PRDR Air Quality Management Plan (2002e2010), 2012

Fig. 6). Half of the projects were focused on energy saving because
enterprises can reap significant financial rewards from these pro-
jects. More importantly, energy saving alleviates pressure on power
plants, thereby reducing pollution. After completing the approved
projects, many Hong Kong-owned factories were rewarded for their
CP partners/excellent partners/supply chain efforts based on their
environmental performance. Since 2009, 31 factories have been
rewarded for their efforts in achieving cleaner supply chain
management.

4.3.3. The CP3 popularization in Guangdong

Fig. 6. The distribution of technology in the CP3.
As a means of disseminating CP technologies as widely as
possible, the CP3 offered a CP technology toolbox for both Hong
Kong-owned and locally owned firms that were interested in
pollution reduction. The CP toolbox includes air pollutant
emissions-reduction and energy-saving technologies. Air pollutant
emissions-reduction technologies include VOCs-, SOx-, and NOx-
reduction technologies, while energy-saving technologies are
categorized into eight major manufacturing industries (see Fig. 3).
CP toolbox users can easily search for and select suitable CP
6 Y. Jiao et al. / Journal of Cleaner Production 265 (2020) 121914
technologies after considering their industry and operations to
obtain an initial understanding of the effects of these technologies,
with preliminary ballpark figures regarding their costs and benefits.
The CP toolbox is easy to use, as outlined in Fig. 7.
5. Discussion
The implementation of the CP3 significantly improved the
environmental performance of FDI from Hong Kong in Guangdong,
and the CP of Hong Kong-owned factories was enhanced. Energy
efficiency increased with the utilization of energy-saving technol-
ogies proposed by demonstration projects and the CP technology
toolbox. Therefore, numerous Hong Kong-owned factories were
evaluated as provincial or municipal CP enterprises. In addition to
this obvious achievement by Hong Kong-owned factories, there are
other more important empirical and theoretical implications of the
CP3 for both Hong Kong-owned and locally owned factories.
5.1. Effect of the CP3
5.1.1. Technology dissemination and spillover effects
Many CP technologies have been disseminated from Hong
Kong-owned enterprises to locally owned enterprises in Guang-
dong. The first type of dissemination is “quiet leakage,” such as the
migration of managers, skilled labor, and business practices. The
second type is proactive dissemination, such as publicity aimed at
promoting the adoption of CP technologies by organization-
supported initiatives, for example, the CP toolbox contains many
demonstration/verification case reports, which can be used by
firms in related industries. Further, the Hong Kong Productivity
Council published guidelines for the adaptation of general CP
technologies to specific industries or processes, such as spray-
painting, printing, and plastic bag manufacturing. In addition, the
Hong Kong Productivity Council organized technique-extension
and technique-transfer events, such as the “Greening the Supply
Chain CP Seminar.” Numerous managers and directors of firms
attended demonstrations of processes, such as the use of an auto-
transformer to stabilize voltage and save energy (plastics and
rubber industry) and the combination of zeolite and bags to filter
waste air and reduce emissions of VOCs (printed circuit boards).
Fig. 7. CP technology toolbox.
The third type of dissemination involves building a cleaner supply
chain. Under the Hong KongeGuangdong CP Partners Recognition
Scheme, enterprises that actively encourage their Hong Kong-
owned factory suppliers to adopt CP are awarded a “Hong
Kong Guangdong CP Partner (Supply Chain)” commendation
(Hong Kong Productivity Council, 2019). These three types of CP
dissemination served to transfer advanced CP technologies and
management experience from Hong Kong-owned firms to locally
owned firms, generating significant spillover effects.
The spillover effect from technology transfer, diffusion, and
transformation serves to narrow the technology gap between Hong
Kong-owned factories and locally owned factories in Guangdong.
Thus, FDI benefits domestic firms through both technology
(Buckley et al., 2002) and knowledge spillovers (Branstetter, 2000;
Blomstro €m and Sjo€holm, 1998), such as reverse engineering, skilled
labor turnover (Glass and Saggi, 2010), demonstration effects,
supplierecustomer relationships, and external design patents
(Cheung and Lin, 2004). In the CP3, the demonstration project was
the most direct means of disseminating pollution-reduction and
energy-saving technology to locally owned factories because the
Hong Kong Productivity Council arranged for the managers of
locally owned factories to attend demonstrations after establishing
their environmental and economic interests. Moreover, technology
diffusion-generating spillover effects stimulate the entry of addi-
tional firms (Blalock and Gertler, 2008) and increase the labor
productivity (Djankov and Hoekman, 2000; Liu, 2002) and effi-
ciency of domestic factories (Blomstro € m and Persson, 1983;
Buckley et al., 2002), which ensures sustainable development
(Chuang and Lin, 1999).
The diffusion of cleaner technology enhances the CP capability
of locally owned factories in Guangdong. Under the Hong
KongeGuangdong CP Partners Recognition Scheme, many Hong
Kong-owned factories were recognized as CP factories by either the
Guangdong government or the relevant municipal government.
The diffusion of clean (Taylor, 2004), low-carbon technologies
(Lema and Lema, 2013), the transfer of eco-friendly products and
production processes (Zhang and Zhou, 2016), and the transfer of
high-technology industries (Letchumanan and Kodama, 2000) re-
duces pollution (Shapiro, 2014) and improves the host country’s
environmental welfare (Jiang et al., 2018). On a larger scale, the
clean development mechanism (CDM) has promoted technology
transfer by financing thousands of emissions reduction projects
using cleaner technologies developed in high-income countries
(Dechezlepre ^tre et al., 2008; Zhang and Wang, 2011). Similarly, the
cleaner technologies used in the CP3 were developed in Hong Kong,
which has a much higher average income level than Guangdong.
Both the CP3 and the CDM aim to reduce pollution and improve
environmental welfare. However, the CP3 is more precisely tar-
geted than the CDM because the former is focused on Hong Kong-
owned factories located in Guangdong. Although the subsidies by a
single project received from CP3 is much smaller than from CDM,
CP3 sowed many more seeds on Hong Kong-owned factories
through on-site improvement assessments, demonstrations, and
verification (see Table 2). Further, the technique-extension and
technique-transfer events inspired numerous enterprises to
embrace the generation of cleaner technologies and processes.
Furthermore, the CP3 set an important example to the world,
namely, taxpayers’ money can be applied through FDI to address
environmental problems beyond the home country’s border,
enabling the home country to reap numerous benefits.
5.1.2. Cleaner supply chain management
Cleaner supply chain management is an important instrument
for the promotion of the CP3. A cleaner supply chain includes the
use of cleaner technology, processes, and products that have less
 Y. Jiao et al. / Journal of Cleaner Production 265 (2020) 121914
impact on the environment. It involves cleaner practices at various
stages of the supply chain, including strategic planning, product
and service design and development, purchasing, production, and
distribution, and in relation to information technology/information
systems and human resources (Subramanian and Gunasekaran,
2015). Cleaner supply chain management not only improves the
performance of the focal firm, but also improves the performance of
firms that are both upstream and downstream in the supply chain.
For example, cleaner supply chain practices for cassava starch
production using improved technology and management processes
resulted in a reduction in resource consumption and reduced
emissions (Pingmuanglek et al., 2017). Two key issues need to be
addressed in promoting cleaner supply chains: Financial assistance
and collaboration. First, local governments can play a positive role
in the design of a sustainable supply chain network by offering
subsidies (Chalmardi and Camacho-Vallejo, 2019; Hou et al., 2019)
and tax incentives (Shi et al., 2019), and by encouraging manage-
ment to use cleaner technologies (Chalmardi and Camacho-Vallejo,
2019). From this point of view, Guangdong should offer special
funding and tax incentives to Hong Kong-owned factories to
encourage them to improve the supply chain network. Collabora-
tion is also effective in improving environmental performance.
Thus, supply chain managers must extend their efforts to improve
environmental practices by fostering collaboration among local
governments, sources of FDI, and local firms. Investment by firms in
environmental technologies cannot be made independently of
other organizations in the supply chain (Vachon and Klassen,
2007). Thus, the Guangdong government should encourage
collaboration among supply chain partners. Collaboration with
suppliers has been shown to have a positive effect on R&D in
relation to pollution reduction technologies, unlike collaboration
with customers (Vachon, 2007; Vachon and Klassen, 2007). Thus,
the construction of cleaner supply chains requires further close
collaboration among locally owned factories, local governments,
Hong Kong-owned factories, and the Hong Kong government.
5.1.3. Cleaner operations mechanism
The CP3 was originally designed to improve the environmental
performance of Hong Kong-owned factories in Guangdong.
Continued efforts on the part of both Hong Kong-owned and locally
owned factories have seen the CP3 contribute to cleaner technology
transfer through the financing of emissions-reduction and energy-
conservation projects. Indirect and direct technology spillovers
have expanded the benefits to all factories located in Guangdong,
thereby creating a cleaner operations mechanism. The key ele-
ments of a cleaner operations mechanism are outlined in Fig. 8.
The success of the cleaner operations mechanism relies on a
combination of sufficient funding and efficient implementation and
management. Both Hong Kong and Guangdong have provided
special funding to support the adoption of cleaner technology. In
addition to this funding, efficient implementation and manage-
ment is vitally important. Significant knowledge and technology
spillovers will not be generated if the characteristics of the locally
owned factories are markedly different from those of the Hong
Kong-owned factories. Additionally, CP3, as green awareness and
demonstration programs, can improve awareness among the gen-
eral customers for widening cleaner production in the host country
(Zameer et al., 2020). Thus, the CP3 has targeted the eight industry
sectors that produce the most pollution.
5.2. Reasons for the success of the CP3
5.2.1. Bottom-up pressure to reduce air pollution
The CP3 initiative had its roots in bottom-up pressure. Re-
searchers and activists pressured the government to improve air
7
quality when air pollution in Hong Kong reached unprecedented
levels in 1997. The business sector voiced its concerns at meetings
of the Sustainable Development Subgroup of the Greater Pearl
River Delta Business Council, which is a government-appointed
body created in March 2004 to advise the HKSAR chief executive
on business issues. In 2005, another business group, the Federation
of Hong Kong Industries, launched the “One-Factory-One-Year-
One-Environment Project” to raise awareness and encourage en-
terprises operating in the PRDR to adopt good environmental
practices. After 2005, the partially government-funded Hong Kong
Productivity Council also devoted more resources to helping com-
panies operating on the mainland to improve their environmental
performance. In practice, cooperation in addressing pollution is
affected by current emissions levels (Breton et al., 2010) and the
political interests of governments (Wishnick, 2009). Public con-
cerns and social movements in relation to environmental pollution
are important drivers helping to shape policy interventions
(Forsyth, 2014), and can determine the level of adoption and
diffusion of environmental policies (Massey et al., 2014). Therefore,
having become concerned about the high levels of pollution
emissions, as shown in Tables 1 and 2, and the need to achieve the
2010 emissions reduction targets, Hong Kong and Guangdong
agreed to implement the CP3.
5.2.2. The importance of solid institutional arrangements
A solid institutional arrangement is one of the main reasons why
the CP3 has been successfully implemented in Guangdong. The
basic institutional framework of the CP3 is outlined in Fig. 9.
To address the transboundary environmental problems in the
PRDR, Hong Kong initiated cross-border discussions with Guang-
dong that eventually led to the creation of the Hong
KongeGuangdong Environmental Protection Liaison Group
(HKGEPLG) in 1990. In June 2000, the HKGEPLG was renamed the
Joint Working Group on Sustainable Development and Environ-
mental Protection. The first Hong KongeGuangdong Cooperation
Joint Conference was held in 2001 and was attended by both the
HKSAR chief executive and the Guangdong provincial governor.
The HK Guangdong Energy Efficiency and CP Special Panel was
upgraded in 2015 to become the HK Guangdong Joint Working
Group on CP, which reports directly to the HK Guangdong Coop-
eration Joint Conference. The panel leaders for Hong Kong and
Guangdong are the Environmental Protection Department of Hong
Kong and the Economic and Information Commission of Guang-
dong Province, respectively. The panel focuses on jointly studying
and formulating policies those are conducive to the promotion of
energy efficiency and CP by both sides, encouraging enterprises in
Hong Kong and Guangdong to practice energy efficiency and CP.
The Environmental Protection Department of Hong Kong and the
Economic and Information Commission of Guangdong Province
provide financial assistance and develop supporting policies. The
Hong Kong Productivity Council and the CP Center of Guangdong
are jointly responsible for the daily operation of the CP3. Their
multilevel institutional arrangement is advantageous for imple-
menting the CP3. To overcome barriers to diffusion of cleaner
technologies, technological innovation has been integrated with
environmental policy regimes, an efficient approach (Foxon and
Pearson, 2008) that needs significant institutional capacity, which
is an important factor in the development and management of
industrial symbiosis (Spekkink, 2013; Wang et al., 2017). Devel-
oping institutional capacity often requires pilot projects to stimu-
late learning processes (McCormick and Kåberger, 2007) and
enable the absorption of international expertise (Wang et al., 2017).
The Hong Kong Productivity Council finances numerous demon-
stration projects of cleaner technologies developed in Hong Kong-
owned factories and organizes several technique-extension and
8 Y. Jiao et al. / Journal of Cleaner Production 265 (2020) 121914
Fig. 8. The elements of a cleaner operations mechanism.
Fig. 9. The institutional arrangement underlying the implementation of the CP3.
technique-transfer events involving both Hong Kong-owned fac-
tories and locally owned factories every year. These demonstration
projects and technique-extension and technique-transfer events
stimulate local governments to provide support. However, to
further improve the implementation of the CP3, Guangdong’s
institutional arrangements and institutional capacity need be
updated and strengthened to facilitate better collaboration with
Hong Kong.
5.2.3. Burden-sharing scheme
A rational burden-sharing scheme has been a key factor in
sustaining the CP3 over the last decade. The main financial assis-
tance is provided by Hong Kong (see Fig. 1), while the Guangdong
government provides additional subsidies via special funds for
energy conservation and CP. The current burden-sharing scheme
for the CP3 is based on the polluter-pays rule. In designing a
burden-sharing scheme, efficiency and equity are two important
aspects that need to be considered (Marklunda and Samakovlis,
2007), while three basic principles for evaluating a burden-
sharing scheme are responsibility, need, and capacity (Torvanger
and Ringius, 2002). In practice, historical emissions, income level,
emissions per capita, and current emissions are the four main in-
dicators that are considered in designing a burden-sharing scheme
(Carlsson et al., 2013). Previous studies have shown that there is no
burden-sharing rule that is compatible with all three evaluation
principles (Ringius et al., 2002; Heitmann and Khalilian, 2011). The
burden-sharing scheme used in the CP3 is based on responsibility
and capacity to pay, which is similar to the “common but differ-
entiated responsibilities and respective capabilities” (Dellink et al.,
2009). Hong Kong-owned factories are responsible for a significant
proportion of the environmental damage in Guangdong because
Hong Kong reaps much of the benefits of the production in
Guangdong. Considering the economic inequality (Cardenas et al.,
2002) and differences in income levels (Goodland et al., 1994) be-
tween Hong Kong and Guangdong, Hong Kong, which enjoys a
much higher level of income, has more capacity to provide financial
assistance in support of the dissemination of clean technologies.
The burden-sharing scheme has been sustained for ten years
because in 1998 the HKSAR government provided an interest-free
loan to Guangdong to build a closed aqueduct to improve the
quality of water supplied to Hong Kong. This interest-free loan
created a precedent whereby the HKSAR government could use
taxpayers’ money to fund activities outside Hong Kong that would
benefit the HKSAR (Loh, 2011).
6. Conclusions and policy implications
The Hong Kong Guangdong CP3 is the first scheme that in-
volves a home government (Hong Kong) improving environmental
 Y. Jiao et al. / Journal of Cleaner Production 265 (2020) 121914
performance through FDI by introducing and disseminating cleaner
technology among locally owned factories in the host region
(Guangdong). The CP3 was used to empirically examine the impact
of FDI on environmental quality in the host region. The detailed
implementation of CP3 is examined from the perspectives of
funding, targets and objectives, technology supply, and commen-
dations from the Hong KongeGuangdong CP Partners Recognition
Scheme.
By participating in the CP3, Hong Kong-owned factories ac-
quired much cleaner technology and financial support, thereby
transforming their industries and improving their environmental
performance. Meanwhile, the cleaner technology was disseminated
to locally owned factories through quiet leakage, proactive
dissemination, and supply chain management. The diffusion of
cleaner technologies and management experience from Hong
Kong-owned firms to locally owned firms in Guangdong generated
significant spillover effects and narrowed the technology gap,
thereby enhancing the CP of factories located in Guangdong.
Cleaner supply chain management that aims to improve both up-
stream and downstream firms is an effective approach, but needs
further support from the governments of both Hong Kong and
Guangdong. Under the CP3, Hong Kong-owned factories have
evolved to become a source of strength in achieving cleaner oper-
ations. Several reasons for the successful implementation of the
CP3 were identified. The CP3 initiative was driven by trans-
boundary air pollution in Hong Kong and Guangdong Province and
subsequent pressure to achieve reductions in pollution emissions.
This bottom-up driver, a solid institutional arrangement, and a
rational burden-sharing scheme are the main reasons for the suc-
cessful implementation of the CP3.
The success of the CP3 provides a vivid picture to policymakers
of both home government and host government of FDI on how to
cooperatively improve the environmental performance of FDI and
decrease the damage to the host countries. It clearly tells home
governments of FDI what they can do, how they can do, and
whether they can do it better to improve the environmental per-
formance of FDI at the host countries through a proactive and
effective instrument like cleaner production. For policymakers of
home government, using innovative economic initiative in-
struments or policy to regulate environmental performance of
outward FDI will ensure the promotion of its long-term interest and
achieve common cleaner development, which prevent the damage
to environment of host countries. For policymakers of host coun-
tries, cooperating with home government to promote FDI operate
cleaner can lead to the improvement of environmental perfor-
mance, spillovers of cleaner technology to locally owned factories
and assistance of the socioeconomic sustainable development. CP3
also offers policy implications that cleaner production, well-
organized proactive environmental management innovation, can
generate multiple effects on achieving green growth goals, guar-
anteed by a rational burden-sharing scheme and solid institutional
arrangement.
The traditional pollution haven hypothesis claims that polluting
industries will relocate to countries with less stringent environ-
mental regulations and damage the environment of host countries,
which emphasizes the unfavorable impact of FDI on the host
countries. However, there is none consideration about that
whether FDI continuously improves its environmental perfor-
mance after entering a market in host countries.
CP3 gives a good practical example to the home government of
FDI, by showing how to use cleaner production as proactive
approach to improve environmental performance of outward FDI,
ensure the long-term operation of cleaner production and assist the
sustainable development of host countries or regions. Cleaner
production not only effectively improves the efficiency of energy
9
and materials consumption, decreases the pollution emissions of a
single firm, but also promotes that of many firms through limited
investment at regional scale.
In theory, the success of CP3 provides direct evidence to support
the pollution halo hypothesis that FDI from developed regions can
promote cleaner development of host developing regions via the
positive intervention of home government rather than heavily
pollute host regions. Developing countries can benefit from tech-
nology dissemination and spillover effects to green supply chain
and form cleaner development.
Declaration of competing interest
The authors declare that they have no known competing
financial interests or personal relationships that could have
appeared to influence the work reported in this paper.
CRediT authorship contribution statement
Yuanqi Jiao: Investigation, Data curation, Methodology, Writing
- original draft. Chuanwei Ji: Investigation, Data curation, Valida-
tion. Shuyan Yang: Investigation, Data curation, Formal analysis.
Guojun Yang: Investigation, Data curation. Meirong Su: Writing -
review & editing, Supervision, Project administration. Hongbo Fan:
Resources, Supervision.
Acknowledgments
This work was financially supported by the National Key
Research Program of China (Grant No. 2016YFC0502800), the Na-
tional Natural Science Foundation of China (No. 71673027), the
Natural Science Foundation for Distinguished Young Scholars of
Guangdong Province (No. 2017A030306032). We thank Geoff
Whyte, MBA, from Liwen Bianji, Edanz Group China (www.
liwenbianji.cn/ac), for editing the English text of a draft of this
manuscript.
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