Good for Business, Not So Much for the Environment? Entry Into Importing and the Energy Intensity of Indian Plants

The global fragmentation of production has important implications for the environment. As emerging economies increase their participation in trade, scale effects increase environmental impacts worldwide. Yet at the same time, access to international markets might help offset these impacts by increasing the efficiency of production. Existing literature suggests that trading firms tend to be more energy efficient than non-traders. However, this literature does not take into account the effect of firms’ product baskets. In this paper, we leverage a rich plant- and product-level database from India to investigate the effects of importing on plant-level-environmental outcomes. We first construct a measure of energy efficiency that is net of effects arising from plants’ product baskets. We then use an event study set up to compare outcomes between importers and future importers at the time of their entry into import markets. Our design takes advantage of plants’ staggered entry into importing to address issues of selection. Our findings suggest that after they start importing, plants experience increases in their energy intensity. Plants which start importing also grow larger and more productive and diversify their product baskets. Our results suggest that access to international markets leads to gains in scale and productivity, but not in environmental performance. This finding suggests that there is an environmental cost to learning and product diversification.