Abstract
One important and frequently-raised issue about foreign direct investment (FDI) is the potentially negative consequences for the environment. The potential environmental cost due to increased emissions may undermine the economic gains associated with increases in FDI inflow. Although the literature is dominated with this adverse view of FDI on the environment, there is also a possibility that FDI can contribute to a cleaner environment, especially, if FDI comes with green technologies and this creates spillovers for domestic industries. Theoretically, the effect of FDI on the environment can be negative or positive.
To deal with the theoretical ambiguity about the FDI environment nexus, many empirical studies have been conducted but their results only reinforce the controversy as they produce contrasting results. We conduct a meta-analysis of the effect of FDI on environmental emissions using 65 primary studies that produce 1006 elasticities. Our results show that the underlying effect of FDI on environmental emissions is close to zero, however, after accounting for heterogeneity in the studies, we find that FDI significantly reduces environmental emissions. Results remain robust after disaggregating the effect for countries at different levels of development as well as for different pollutants.
JEL codes: F21, F60, Q56
Keywords: FDI; pollution haven hypothesis; pollution halo hypothesis; environment; emissions; meta-analysis.
- More information
Binyam Afewerk Demena is a Postdoctoral Researcher at the International Institute of Social Studies (ISS), Erasmus University Rotterdam (EUR). He obtained his PhD and MA in Development Economics from the ISS, EUR. His research interests relate to primary empirical research and meta-analysis in development economics, international economics, environmental economics, health economics and other related issues. He has published articles in Applied Economics, Journal of Economic Surveys, Third World Quarterly, and Journal of International Trade and Economic Development among others.
Sylvanus Kwaku Afesorgbor is Assistant Professor at the Department of Food, Agricultural and Resource Economics (FARE), University of Guelph, Ontario, Canada. His research and teaching experiences are in the areas of International Political Economy, Globalisation and Development, Impact Evaluation, Applied Econometrics, and Food and Development.
