Testing the Pollution Haven Effect: Does the Type of FDI Matter?

Exchange Rate Volatility and Export-Oriented FDI

This book is timely in its investigation of the environmental influence of globalization and China. Volume 14 focusses on : theoretic modeling of environmental impact of foreign direct investment (FDI) on host countries, international openness and corporate environmental performance in China, environmental regulation and Chinese firm productivity, industrial sector data in China, environmental impact of foreign vs. domestic capital investment in China, globalization and climate change and new empirical panel data evidence This book answers the following questions : does FDI affect the environment of host countries? How international openness influences China's corporate environmental performance? Is lax environmental regulation attractive for multinationals to invest in China? The impact of corporate social responsibility on multinationals? Does FDI play a role trade and ISO14001 certification? Can rigorous environmental regulation enhance Chinese firm productivity? Does FDI concentrate in pollution intensive sectors in China? Is globalization good or bad for climate change? How does FDI and social corporate responsibility stack up against the pollution haven hypothesis?

Foreign Direct Investments (FDI) has been considered an important source of economic growth and technological development in transition economies. The previous empirical literature has shown that FDI promote economic growth via complementary effects on domestic investments, increases in productivity and overall economic efficiency, giving rise to an increasing interest in understanding the key determinants of FDI. Apart from traditional FDI determinants, favourable tax policy has been considered an important factor influencing MNCs’ location decisions. The goal of this paper is to investigate the impact of corporate income tax on FDI in the context of less advanced transition economies and to analyse whether the tax effect is conditional on the level of economic development. A small number of studies exist analysing the importance of tax policy regime in attracting FDI covering South-East European countries. In this study, we rely on panel gravity econometric framework and examine the impact of tax policy on FDI using bilateral FDI flows between 8 home and 8 South East Europe host countries in the period 2000–2018. We estimate the regression using Prais-Winsten correlated panels corrected standard errors PSCE method to obtain robust estimates of individual effects in the presence of heteroscedasticity and serial correlation. The seven SEE host countries included in the sample are considered of similar economic structures and institutional transformation, which seems important in analysing tax policy effectiveness and minimising biases associated with econometric modelling of FDI determinants. Finally, we study this relationship in an integrated framework considering traditional gravity forces as well as a number of additional FDI determinants, including institutional factors. We show that, although tax policy seems an important determinant of FDI, its effects seem to be conditional on the level of technological development. Given these findings, reducing corporate income tax may be considered an effective tool in promoting FDI, which seems to be of particular importance for less developed transition economies. The results are robust to different model specifications and consideration of endogeneity.Implications for Central European audience: The direct implications of this research for business policymakers in CEE include the need to revise and optimise the levels of corporate income tax and incorporate this specific policy instrument in FDI strategies. In particular, the results of this research indicate that tax cuts have been more effective in attracting FDI in countries that are at a lower level of technological sophistication. The managers could seek to size the investment opportunity related to possible further corporate income tax cuts in the group of least developed CEE amid the economic rationale for tax policy competition among these countries.

This PhD dissertation investigates the links between foreign direct investment (FDI), pollution and environmental policies in an interdependent world. To tackle the issue of spatial dependence, I propose to apply new spatial estimators. <br>The thesis consists of four papers. The first chapter, entitled <i>Spatial Dynamic Panel and System GMM: a Monte-Carlo Investigation</i>, investigates the finite sample properties of estimators for spatial dynamic panel models in the presence of several endogenous variables. I show that in order to account for the endogeneity of several covariates and get unbiased estimates, you should apply the system generalized moments method (GMM) estimator instead of traditional spatial dynamic estimators. From a practical point of view, system GMM is computationally less demanding and easier to adapt to unbalanced panel data. <br>In the second paper, <i> Pollution Havens: a Spatial Vector Autoregression Approach</i> (VAR), I investigate the mutual relationship between FDI, pollution and trade openness for 141 countries during the nineties. After applying second generation panel unit root tests, I estimate a trivariate spatial VAR model where a shock occurring in a given country can potentially affect the economic conditions in the neighboring countries. Based on generalized empirical likelihood estimations, the results highlight a reverse causality between FDI and pollution emission, suggesting the existence of a potential endogenous pollution haven effect to low income countries in particular. In addition, spatial spillovers play a key role in the linkage between FDI, trade openness and SO2 emission and highlight the strategic nature of these variables. Multilateral and regional cooperation between developed, emerging and developing countries should be extended to capitalize on these spillovers, address potential issues and seize new opportunities. <br>In line with the previous study, in the third paper, entitled <i> Complex FDI and Environmental Regulation: the Role of Spatial Dependence</i>, I investigate if differences in environmental regulations influenced OECD’s FDI allocation during 1981-2000 taking into account “third-country” effects in a multi-country setting. The findings, based on system GMM estimates of a spatial dynamic gravity model, confirm the existence of a negative relationship between FDI and environmental stringency, once I correct for endogeneity and spatial dependence. In addition, the evidence of positive “third-country” effects for FDI suggests the prevalence of highly complex vertically integrated FDI from OECD countries to developing economies. Multinationals tend to allocate each part of the production process in different countries to ensure cost minimization. Emerging and developing countries, which might be tempted to use environmental regulation as an instrument to attract FDI, will only attract the most polluting part of the production process. This is not the best way to ensure sustainable economic growth, at least on the long run. <br>In the last chapter called <i> Unequal Diffusion of Eco-labels: a Spatial Econometric Approach</i>, I analyze the decision to introduce an eco-labelling scheme through a heteroskedastic Bayesian spatial probit. This framework allows the government’s decision to introduce an eco-label program to be influenced by the decision of the neighboring countries. I propose to estimate this model by implementing a new algorithm with higher mixing and converge. Based on a sample, including 141 developing and developed economies, I show that the probability for a country to introduce an eco-labelling scheme depends on the eco-label programs adopted by countries which are spatially close or sharing a strong trade intensity relationship with each other. These results explain why developing countries, which are standards takers, have naturally been put at a disadvantage in terms of eco-labelling adoption. Therefore, eco-label programs should be as transparent as possible and rely on standard harmonization and mutual recognition to remove any potential technical trade barriers and encourage the participation of developing countries.

This study seeks to explain how differences in political risk and economic freedom between host and home countries interact with investing firms’ resource-seeking intent to influence the firms’ outward foreign direct investment (FDI) location choice. Using panel data covering Chinese outward FDI in 62 host countries during the period of 2003-2014, we performed panel data regression analysis. The results show that when firms’ resource seeking intention is high, the FDI location choice is negatively associated with the differences in political risk, but positively associated with the differences in economic freedom between China and the host countries. The results also show that there is a substituting effect between political risk and economic freedom in their interactions with resource-seeking intent to influence FDI location choice. The findings suggest that the Chinese firms’ outward FDI location choice is a result of the interplay and the fit between the firms’ external legitimacy in the host countries and the firms’ internal legitimacy within the multinational organization.

With economic development, air pollution is becoming increasingly serious, which affects the sustainable development of the global economy. In order to explore policy measures to curb air pollution, this paper selects data from 30 regions in China and explores their impact studies on air pollution from the perspectives of environmental regulation and foreign direct investment using a systematic GMM model. Then, the threshold effect model is selected to verify their nonlinear relationship. The conclusions are as follows: (1) Environmental regulation does not pass the significance test. There is no significant “U-shaped” or “inverted U-shaped” relationship between environmental regulation and air pollution. In the eastern region, there is an inverted U-shaped relationship, which is consistent with the environmental Kuznets curve (EKC) hypothesis, and the effect in the central and western regions is higher than in the eastern region of China. (2) The entry of foreign direct investment (FDI) aggravates the environmental pollution problem in China, and the overall status quo is consistent with the pollution haven hypothesis, which shows an inverted U-shaped curve between FDI and air pollution. The eastern region does not have any U-shaped relationships. The other two regions show an inverted U-shaped curve between foreign direct investment and air pollution; these two regions are still in the left half of the curve, and the increase in foreign capital will lead to aggravation of the pollution status quo. (3) The industrial structure will aggravate air pollution in the whole country and the central and western regions; the eastern region shows a suppression effect, but this is not significant. Urbanization exacerbates air pollution in the central and western regions but has an insignificant effect in the eastern region. The level of economic development increases air pollution in all regions. The expansion of the population size brings a large amount of production and living pollution, which aggravates environmental pollution. The research in this paper can provide theoretical references for regional policies to control air pollution.

Debates on foreign direct investment, technological innovation and carbon emission seem unsettling in the literature. We contribute to the literature by investigating the relationships between foreign direct investment, technological innovation, and carbon emissions in Ghana. Using the Autoregressive Distributive Lag (ARDL) method, the analysis reveals that foreign direct investment contributes to reduced emissions in the short run but significantly increases carbon emissions in the long run, aligning with the pollution haven hypothesis. This indicates that Ghana may have a robust environmental regulation that ensures eco-friendly foreign direct investments in the short run, with weak enforcement of regulations resulting in high emissions in the long term. Technological innovation in the Ghanaian context contributes to increased CO2 emissions. However, the interaction effect of foreign direct investments and technological innovation reduces carbon emissions, emphasizing the importance of aligning foreign investments with sustainable technological advancements in Ghana. The study also identifies the Environmental Kuznets Curve (EKC) effect, where emissions rise with economic growth but decelerate at higher GDP levels. The findings underscore the need for stronger environmental regulations and a shift towards sustainable, cleaner energy and technological development to mitigate the environmental impacts of economic growth in Ghana and similar developing countries.

There is an ongoing debate about the impact of inflow of Foreign Direct Investment (FDI) on economic growth in a closed country. This is mainly due to two diversified views pertaining to the relationship between FDI and economic growth. The main arguments in favour of FDI promoting economic growth are: (1) The superiority of multinational corporations (MNCs) over local firms. Output per worker in MNCs taken as a group is often many times greater than in local owned operation. Wages paid by foreign affiliates are also higher than local owned operations in both developed and developing host countries, within the same industries and the same locations. (2) A shift towards greater use of non-equity and cooperative relationships with other enterprises such as alliances, partnership, management contracts or subcontracting arrangements serve corporate objectives. They can provide better access to technologies or other assets, allowing firms to share the cost and risk of innovatory activities and can reduce the production cost of labour-incentive products. (3) Emergence of a network type of organisation expands the scope of interactions between MNCs and enterprises from host countries which will create international economic integration. (4) MNCs create an integrated international product system through FDI. This will broaden the range of resources sought by MNCs in host countries, making firms more selective in their choices. This can also encourage FDI in countries that cannot provide a wide range of resources but have some specific advantage (accounting, technology, products, etc.).

Environmental protection is an essential aspect of the One Belt and One Road Initiative. Chinese enterprises need to pay close attention to their environmental responsibilities arising from their foreign direct investments (FDIs) in other Belt and Road countries. The determination of environmental responsibility is required to consider the sources of environmental obligations and operational logic of different dispute settlement mechanisms. Chinese enterprises face environmental obligations from four dimensions—that is, the Chinese government, host countries, international law, and other informal environmental obligations. The choice of a specific dispute settlement approach depends upon a series of considerations. When pre-judging and evaluating their environmental obligations, Chinese enterprises should, on the basis of the just and reasonable settlement of environmental disputes, clarify the environmental standards, identify the legitimacy and rationality of governmental regulations, review the objective environmental consequence(s), and determine the doctrine of liability fixation to be applied. Chinese enterprises should adjust their development principles of FDI, perform due diligence and prudence, and utilize multiple dispute resolution mechanisms.

Many papers recently published in top international management journals focus on productivity spillovers from foreign direct investment (FDI) to local firms in host countries in the developing world (see, for instance, Liu et al., 2000, 2001; Chung et al., 2006; Meyer, 2004; Buckley et al., 2007; Tian 2007). Some papers found positive FDI productivity spillovers through a competition effect, a linkage effect and an employment effect while others found negative FDI productivity spillovers in the form of 'market stealing' and 'skill stealing'. All the studies have no doubt made significant contributions to the understanding of the interaction between transnational companies (TNCs) and local firms in host countries. However, the studies have so far exclusively examined FDI productivity spillovers at the national level or FDI productivity spillovers within a region in a host country. No effort has been made to look at possible FDI productivity spillovers across regions within a host country. The widening of regional disparities found in developing countries that have recently opened up to FDI indicates a possibility of cross-region FDI productivity spillovers that are to the disadvantage of the poor region within the host countries. Since China opened up to FDI in the late 1970s, for instance, it has witnessed a remarkable widening of the disparities between the advanced coast region and the backward interior region, although the nation, as a whole, has seen phenomenal economic growth

As everybody knows, the foreign direct investment (FDI) is now the main motive force of world economy. As a developing country, China goes quickly and becomes the second largest country in the world in absorbing FDI. By contrast, there is only a little investment coming from China in the international capital market. Shanghai, the largest city in China, has the same situation as whole country. That does not match the functional position of Shanghai as an important international economic, financial and trade center. Shanghai must develop FDI to make it a center of Chinese multinational companies. There are some articles on the FDI of China and most of them are the macroscopic explanation at the national level. This paper pays more attention to Shanghai's FDI. The internal law of industrial structure and investment location of Shanghai's FDI are mainly analyzed in the paper. The location models of Shanghai's FDI are summed up also. Compared with South Africa the successful experience and existing problems of Shanghai's FDI are detailed introduced in detail. The characteristics of the paper is the combination of economy and geography.

The global scene for foreign investment has changed significantly in the past decade. Along with a resumption of high rates of growth, there have been shifts in flows, destinations, determinants and policies. It is within this context that foreign direct investment (FDI) in South Asia will have to be considered in order to have a realistic picture of the prospects for future FDI in the region. The main features of the global FDI scene may be summarized as follows: FDI flows are rising faster than almost all other indicators of economic activity worldwide. FDI has grown at around 25 per cent per annum in the latter 1980s, while trade has grown at under 10 per cent and gross domestic product (GDP) and manufacturing output at around 2–3 per cent. Thus, the share of international production under the control of multinational corporations (MNCs) is increasing rapidly. This reflects the growing economic strength of MNCs in innovation, services and finance, apart from trade. Traditional MNCs remain powerful, but there are many new sources of FDI from the Organisation for Economic Co-operation and Development (OECD) countries as well as from developing countries. While the recent recession in leading investor countries such as the United States and the United Kingdom has led to declines in the rate of growth of FDI by these countries, the rate of growth of FDI still exceeds the rate of growth of their domestic activity. Other major capital-exporting countries, with the exception of Japan, have continued to invest increasing amounts abroad in 1991. This investment behavior shows growing independence of international investors from national economic conditions. The business cycle clearly affects FDI through its effect on demand conditions and business confidence more generally. However, the effects are not as direct and immediate as they are on domestic investment and activity. Thus, recipients of FDI, to the extent that their business cycles move differently from those in capital-exporting countries, may expect to be able to attract FDI flows that depend on their domestic economic conditions rather than conditions in capital-exporting countries. The share of global FDI going to developing countries, currently about 17 per cent, has declined from the early 1980s (25 per cent) and the 1970s (33 per cent). However, the value of such FDI (in current dollars) has risen sharply in the late 1980s by 22 per cent per annum. It amounted to $32 billion in 1990. This rise has been accompanied by a growing differentiation in the destination of investments in the developing world. East and Southeast Asian countries have become the largest recipients, accounting for about 60 per cent of all flows to developing countries. There is a sharp revival in FDI in Latin America (especially Mexico) in the past two years, after a long period in which the region lost its pre-eminent place as the recipient of FDI in the developing world. However, Asia seems set to retain its new role as the leading destination because of its economic dynamism. Africa is losing its (already small) share and shows no signs of reversing this trend despite considerable liberalization of policies. The policy context for international investment has changed dramatically in the last decade. Due to a constellation of factors, i.e., the debt crisis, the evident success of outward-oriented policies in East Asia, and disillusionment with traditional interventionist strategies, there has been widespread liberalization of economic policies towards greater trade orientation, private ownership and reliance on market forces in almost all developing countries. However, since most developing countries are opening up at the same time, only those that offer real economic advantages to the operations of international firms can hope to attract increased FDI on a sustained basis. The ability to attract FDI varies by the nature of activities undertaken. In most simple manufacturing activities, the host country does not need to possess much apart from a conducive policy regime, cheap trainable labor and good infrastructure: However, the location of production facilities for more complex activities increasingly reflects current technological trends and the need for investments to be competitive in world markets. The growing technological sophistication of manufacturing and services mean that investors, faced with an increasingly open trading environment, demand the complementary inputs that make their facilities efficient by world standards. These complementary inputs are rising levels of operator, technical and managerial skills, relatively free access to world-priced inputs, a good domestic base of suppliers and services, and excellent infrastructure. Large markets do remain a major attraction, even in liberalized environments, but in every country the need for local inputs of technology and skills is much more significant than in the days of inward-oriented FDI. MNCs from advanced OECD countries are moving up-market to sophisticated activities, while the more mature, less demanding activities are being increasingly taken over by investors from developing countries, especially in Asia. The East Asian newly industrializing economies (NIEs) are now leading investors in several labor-intensive export activities, and some are moving into more complex capital-intensive and technology-intensive areas. Their dynamism and specialization make them an important source of finance and technology for other developing countries in the region seeking FDI. This is clearly an important consideration for South Asia. With these background features of FDI, we can now turn to South Asia.

Effects of mining sector FDI, environmental regulations, and economic complexity, on mineral resource dependency in selected OECD countries

This paper seeks to investigate the impact of foreign direct investments (FDIs) on industrial pollution ( $$\hbox {CO}_{2}, \hbox {SO}_{2}, \hbox {NO}_\mathrm{x}$$ 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.

From foreign direct investment to environmental regulations: Does a feedback effect ever exist?