An Analysis of the Pollution Haven Hypothesis (PHH) Using Foreign Direct Investment (FDI) Induced Environmental Kuznets Curve (EKC) in OECD Countries

Abstract

Purpose The purpose of this study was to investigate the relationship between foreign direct investment (FDI) and CO2 emissions in OECD countries, and to examine the validity of the evidence for pollution haven hypothesis (PHH) using environmental Kuznets curve (EKC). Design/Methodology/Approach This study utilized 26 OECD countries’ panel and time-series data, which included GDP per capita, FDI outflow, energy uses, renewable energy uses, environmental policy stringency (EPS) index, and CO2 emissions. The econometric procedures were adopted by panel analysis, dynamic panel data (DPD) analysis, and ordinary least square (OLS) for each OECD country. Findings First, in the linear model, the increase of GDP, FDI, renewable energy use, and EPS index have contributed to the decreasing of CO2 emissions. Second, in the non-linear model, the evidence for EKC hypothesis have U-shaped or inverted U-shaped curves, depending on the panel analysis procedures. Finally, in the time-series data analysis, even if 13 OECD countries had the evidence for the EKC hypothesis, there were small portions of the 26 OECD countries with the validity for PHH. Research Implications Policy makers need to consider both the existence of OECD countries on PHH and the economic impact of FDI outflows. Also, we need environmentally friendly policies and technologies to reduce the negative environmental effects of FDI outflows to developing countries. Thus, it is necessary to intensify the international corporation and additional environmental policies to reduce CO2 emissions by increasing the scale effect of FDI.