A Chinese-owned tanning factory based in Somaliland has been accused of dumping dangerous chemicals in waterways. But the government has failed to intervene for fear of spooking foreign investment, according to local people.

Jeronimo Group of Industries and Trading PLC, a subsidiary of Chinese glove-making firm Phiss, is the first and only foreign-owned company in the breakaway east African state. It has been operating a factory in the village of Dar-Buruq, 60km outside the capital Hargeisa, since 2008.

People living near the factory have made numerous complaints about respiratory problems. A former worker at Jeronimo named Ibrahim said that one day, while mixing chromium compounds without a mask, he was overcome by the smell and fell down, hitting his head. "The company did not take me to the hospital," he says. "To this day I still have breathing problems." Other locals confirmed many health complaints had been made.

When the Guardian investigated the Jeronimo compound it found an unbearable smell, and workers with no face masks or proper shoes and sacks of corrosive material spilling onto the factory floor.

Industrial waste is dumped in local waterways, the company admits, but it is adamant it has adhered to local and international rules governing the tanning industry. Livestock, which comprises up to 80% of local trade, has disappeared as animals refuse to drink the water and their herders move elsewhere, said one village elder. "[The livestock industry here] is dead, which has also created poverty," says Mohammed, a local government official. "The water here was free; God-given. Now people have to buy it from travelling sellers. A 20-litre jerry can costs 10,000 Somaliland shillings ($0.80). It is too much."

Foreign investments like Jeronimo are seen as vital in proving Somaliland's worth as an independent nation, a point not lost on Dar-Buruq's residents. "We've talked to ministers, deputy ministers. Each time our arguments are passed on to someone else," one village elder says. "The government considers that it is fighting a broader war internationally to attract foreign investors. So if this one is clamped down on it will have a negative impact on that."

President Ahmed Mahamoud Silanyo's government has done little to stop the factory from dumping waste, despite continued appeals from locals.

Somaliland's chamber of commerce secretary general, Ibrahim Ismail Elmi,said that while a seven-minister delegation was sent to inspect Jeronimo in 2008, the situation has been "under review" ever since.

But another senior official, who asked to remain anonymous, added: "We suspect them [Jeronimo]. They use poisons and chromes are getting into the river." Jeronimo has a $6m agreement with the Somaliland government, the official claims, that has to be paid in full should the firm be shut down. "We don't have the capacity to refund them, so we just give advice."

"If the government was worried about these health issues, they should have checked before we came," says Li Fai La, the factory manager . Rather than remove or recycle effluent, he said the company dumps industrial waste "in water 3km away from the factory." Although he did not specifiy what percentage of waste is dumped, the Guardian understands the factory has no waste management system in place.

Li believes the complaints are economically driven, and says that he has considered moving Jeronimo to neighbouring Ethiopia. "You can go to the factory now," he says. "Yes, the smell is bad but trees are growing and there are fish in the water nearby."