Abstract
In this study we aim to test the effects of foreign direct investment (FDI) on carbon emissions (CO2) in 20 Latin American countries during the period of 1990–2018. Based on the atlas method of the World Bank, we divided the countries into three groups according to their real gross national income per capita: high-income, upper-middle-income and lower-middle-income countries. We used cointegration techniques and causality tests to evaluate the relationship between the variables. To assess the strength of the cointegration vector, we applied the dynamic ordinary least squares (DOLSs) model for individual countries and the dynamic panel ordinary least squares (PDOLSs) model for groups of countries. The results suggest that the entry of FDI into Latin American (LA) countries increases CO2 emissions, affecting the environmental quality. These findings disagree with the environmental Kuznets curve (EKC) hypothesis but, in contrast, they are in line with the pollution haven hypothesis (PHH). Moreover, we show evidence in long-term equilibrium relationship between FDI input and CO2 emissions, which is not the case for the short-term equilibrium. Some additional results suggest that FDI flows do not cause the CO2 emissions in LA countries. The empirical findings suggest policymakers to design policies to “the second-best theory”, targeting FDI flows to their economies to solve economic problems in the short term, but thereafter they may guarantee the reduction in environmental pollution, based on environmentally responsible FDI and stronger regulations. In other words, the transition from a pollution haven to the applicability of the environmental Kuznets curve (EKC). This study contributes with scarce empirical evidence for LA countries in this issue.
Highlights
The hypothesis of the environmental Kuznets curve (EKC), tested as an extension to the pioneering works of Kuznets [1,2], suggests that environmental damage increases with per capita income and decreases, denoting a quadratic relationship in the shape of an inverted U [3]
We estimated that foreign direct investment (FDI) inflows exert a positive and statistically significant effect on CO2 emissions for the whole panel, where an increase of 1% in FDI inflows increases CO2 emissions by
An increase of 1% in FDI inflows increases CO2 emissions by 0.08%, 0.03%, and 0.02%, respectively, with highincome countries (HICs) accounting for the greatest effect on environmental degradation from FDI inflows
Summary
The hypothesis of the environmental Kuznets curve (EKC), tested as an extension to the pioneering works of Kuznets [1,2], suggests that environmental damage increases with per capita income and decreases, denoting a quadratic relationship in the shape of an inverted U [3]. The EKC curve has been refuted by a more recent hypothesis that studies the effect of trade on environmental pollution, the well-known pollution haven hypothesis (PHH) [4,5] which states that highly polluting multinational corporations move to developing countries with weaker environmental standards, where the cost of complying with environmental regulations is lower. Sustainability 2021, 13, 12651 inflows [6,7,8]. A large body of literature, such as some of those quoted, estimates the link between FDI inputs on environmental degradation in the framework of the EKC model. In this context, we aim to test the EKC for the case of 20 Latin
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
