How Does Foreign Direct Investment Affect Pollution? Toward a Better Understanding of the Direct and Conditional Effects

Posted: 10 May 2016

See all articles by Natalia Zugravu-Soilita

Natalia Zugravu-Soilita

University of Versailles Saint-Quentin-en-Yvelines

Date Written: August 21, 2015

Abstract

This paper seeks to investigate the impact of foreign direct investments (FDIs) on industrial pollution (CO2, SO2, NOx and BOD emissions) on a large sample of highly heterogeneous countries. By using panel data on manufacturing FDIs from France, Germany, Sweden, and the United Kingdom between 1995 and 2008, and by developing an empirical model with “first” and “second order” interaction terms, we investigate the existence and the conditionality of the most controversial FDI-induced effects on industrial emissions, i.e., Pollution Haven, Factor Endowments and Pollution Halo hypotheses. The paper has three main findings:

(1) the central hypotheses linking pollution to FDI are found to act simultaneously, with opposing effects;

(2) FDIs are associated with pollution reduction, i.e., predominating pollution halo induced effect, in countries with low to average capital-to-labour ratio but not too lax environmental regulation;

(3) FDIs are found to increase pollution, i.e., prevailing pollution haven and/or factor endowments induced effects, in countries with average capital endowments and lax environmental regulations, as well as in all the capital abundant countries, though with a smaller magnitude in countries having strict environmental regulations and/or a high-skilled labour force.

Some specific and interesting findings are discussed regarding different FDI-origin countries and FDI-host country groups.

Keywords: Environmental regulation, FDI, Industrial air and water pollution, Pollution halo, Pollution haven

JEL Classification: F18, F23, Q53, Q56

Suggested Citation

Zugravu-Soilita, Natalia, How Does Foreign Direct Investment Affect Pollution? Toward a Better Understanding of the Direct and Conditional Effects (August 21, 2015). Environmental and Resource Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2777345

Natalia Zugravu-Soilita (Contact Author)

University of Versailles Saint-Quentin-en-Yvelines ( email )

47 Bd Vauban
Guyancourt, 78280
France

HOME PAGE: http://sites.google.com/site/nataliazugravu

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