Economic Growth and Environmental Impacts of Foreign Direct Investment in Emerging Market Economies

Economic Growth and Environmental Impacts of Foreign Direct Investment in Emerging Market Economies

Adem Gök
DOI: 10.4018/978-1-5225-8547-3.ch006
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The chapter investigates the role of FDI on growth, the role of FDI on environmental quality, and the role of environmental quality on FDI in 23 emerging market economies over the period of 1993-2014 by panel VAR analysis. It observes that FDI contributes to economic growth and environmental degradation in emerging market economies. In addition, environmental degradation attracts FDI inflows into host emerging market economies. The results support pollution haven hypothesis and contradict pollution halo hypothesis.
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The Effect Of Fdi On Growth

The main benefit of FDI is that it is more conducive to long-run growth than other forms of capital inflows based on the following facts (Walsh and Yu, 2010). FDI is a major source of technology and knowledge. FDI assists human capital formation, contributes to international trade integration and helps to create a more competitive business environment (OECD, 2002). FDI enables knowledge and technology spillover from foreign firms to domestic firms.

There is no universal agreement in the literature about the role of FDI on growth. While, most of the empiricists have found positive significant effect of FDI on growth, others found negative significant or insignificant effect. A brief literature for the effect of FDI on growth is as follows.

Key Terms in this Chapter

Pollution Halo Hypothesis: It demonstrates that FDI supplies advanced technology to countries and accordingly causes lower carbon emissions.

Pollution Haven Hypothesis: It is the idea that polluting industries will relocate to jurisdictions with less stringent environmental regulations.

Growth: Economic growth; is the increase in overall production of a country.

Capital Inflows: It refers to movement of funds from a source country into a host country for the purpose of investment, trade or business production.

Environmental Degradation: It means deterioration of environmental quality by depletion of resources, destruction of ecosystems, the extinction of wildlife, and environmental pollution.

Panel VAR: Panel vector autoregressive model; a panel estimation technique which is built with the same logic of standard VAR by adding a cross sectional dimension.

FDI: Foreign direct investment inflows; investment made in a host country by a foreign investor or MNC.

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