Investigation of the Foreign Direct Investment and Environmental Pollution Nexus for Developing Countries

Investigation of the Foreign Direct Investment and Environmental Pollution Nexus for Developing Countries

Orkun Çelik, Özge Korkmaz, Zafer Adalı
DOI: 10.4018/978-1-7998-8335-7.ch019
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In theory, the foreign direct investment and environmental pollution nexus is explained by three hypotheses. Firstly, pollution haven hypothesis assumes that there is a positive nexus between these variables. Secondly, pollution halo hypothesis supposes that there is negative connection between these variables. Lastly, neutrality hypothesis asserts the non-existence of the connection between these variables. In recent years, many researchers have frequently tested whether these hypotheses are valid for different countries. In this study, applying Westerlund panel cointegration test, the authors aim to explore the nexus between foreign direct investment and environmental pollution for 23 developing countries after global crisis. For this aim, they use annual data covering the period 2009-2019. According to the obtained empirical findings, the presence of the long-term nexus between foreign direct investment and environmental pollution is not detected for 23 developing countries. Accordingly, the authors can say that there is neutrality hypothesis.
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The 1970s have been accepted as a turning point for understanding the human being's devastating effects on the earth. The policies which increase industrialization, international trade and access to natural resources had been accepted as the best action for a higher standard of living by policy-makers, economists, and even ordinary people until this period. The developed countries had achieved many significant yields of higher economic growth involving technological development, higher income, better education opportunities, and increasing life expectancy. On the other hand, the devastating effects of economic activities such as pollution, global warming, the dramatic increase in CO2 emission, extreme weather events such as rising sea levels, and drought have become observable events worldwide. Therefore, many reports prepared by researchers and organizations have focused on the influences of economic activities on the environment. Inter governmental Panel on Climate Change (2018) report confirmed that human and economic activities caused warming reached approximately 1978-1-7998-8335-7.ch019.m01.C compared to the pre-industrial level. Just the current global warning results have been generated melting of the Arctic sea and the devastating events above-mentioned. Besides, the report also affirmed that if the increase in environmental degradation proceeds in its dominant form, global warming will pass 1.5978-1-7998-8335-7.ch019.m02.C between 2030 and 2052. Many developed countries signed many international agreements (e.g., the Kyoto Protocol and Paris agreement) along with observable devastating natural events and scientific evidence to improve environmental consciousness. These agreements and social awareness for the environment and established new political parties, especially in the European Union (hereafter EU), have urged the developed countries to create and implement policies and regulations to protect the environment. Generally, these policies lead to higher pollution abatement costs and punish dirty industries. Tax, limited production, and the obligations for modified production through environmentally friendly methods have been experienced by the firms operating in the developed countries (Guzel & Okumus, 2020).

In this period, the world experienced another important event named globalization, and the liberalization of international trade shaped the current political and economic structure. Multinational firms operating in developed countries have gradually transferred some part of production or entire production and built new firms to developing countries through foreign direct investment (hereafter FDI). Lower labor costs, natural resources, access to the market, and transformation cost reduction provide an attractive comparative advantage for FDI. This relocation of the production has been welcomed to the developing countries because of many reasons. For example, FDI and other forms are generally seen as factors increasing managerial abilities, overcoming the foreign exchange shortage, creating alternatives against deficient domestic savings, and improving the balance of payment in the developing countries. However, many former developing countries such as Asian countries used FDI, international trade, and other foreign capital forms as the engine of growth and essential factors for achieving the standard of living in developing countries (Nunnenkamp, 2001; Destek & Okumus, 2019).

Key Terms in this Chapter

NH: Pollution haven hypothesis.

PHH: Pollution haven hypothesis.

PHHH: Pollution halo hypothesis.

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