Demystifying pollution haven hypothesis: Role of FDI

Abstract

This study explores the interrelationship between FDI, institutional factors, financial development and sustainability by revisiting the pollution haven (or halo) hypotheses. The data is sourced from the World Development Indicators (WDI) database over the period of 1990–2016, covering 21 developed and developing countries with high carbon emissions. The study uses dynamic panel data estimations by applying the generalized method of moments (GMM) and system-generalized methods of moments (Sys-GMM) over sample countries. The results indicate that FDI has a significant positive impact on environmental degradation. There is evidence of pollution haven hypotheses, especially in developing countries. We contribute to existing literature by revisiting the Environment Kuznets Curve (EKC) hypothesis and presenting the effect of FDI on carbon intensity in the light of institutional factors and financial development. The findings relating to FDI, institutional factors and financial development may cause researchers and policymakers to reiterate the sustainability dimension of foreign capital inflows in both developed and developing countries. We propose the policy framework to include a mandatory Statement of Environmental Disclosures for both listed and unlisted home and host companies at the time of their origin, expansion and fund raising in order to achieve sustainable business goals (SBGs).