Foreign direct investment and pollution havens: evidence from African countries

Said Gharnit,Mohamed Bouzahzah,Jihad Ait Soussane

doi:10.14738/abr.712.7531

Abstract

This study examines the relationship between foreign direct investment (FDI) inflows and carbon dioxide emissions (CE) in order to investigate the validity of the pollution haven hypothesis for 54 African countries, using cointegration approach with dynamic panel data over the period 1960-2018. Based on the panel cointegration analysis, it was concluded that the variables are cointegrated. Moreover, the Dynamic Ordinary Least Square (DOLS) and Fully Modified Ordinary Least Square (FMOLS) results showed that foreign direct investment inflows have a long-run positive relationship with carbon dioxide emissions. Furthermore, according to Granger-Engle causality test results, FDI inflows and carbon dioxide emissions have a positive causal relationship, for both short-run and long-run. Thus, the results of this study validate the pollution haven hypothesis in the African countries. Nevertheless, it is recommended to keep attracting foreign direct investment inflows alongside of implementing mechanisms and instruments for reducing the CO2 emissions under strong environmental policies.

Highlights

During the past quarter century, foreign direct investment (FDI) have known a significant rise in flows around the world, increasing by 533% to 1,297 billion of dollars between 1990-20181
We aim to investigate the validity of the pollution haven hypothesis for African countries by examining the causality between the FDI inflows and CO2 emissions
In this paper, we have combined cross-sectional and time series data to examine the relationship between foreign direct investments inflows and carbon dioxide emissions in order to investigate the validity of the pollution haven hypothesis for the African countries over the period 1960-2018

Summary

INTRODUCTION

During the past quarter century, foreign direct investment (FDI) have known a significant rise in flows around the world, increasing by 533% to 1,297 billion of dollars between 1990-20181. As the studies on the PHH are based on different estimation methods, different dataset, different specification and different variables, their results are mixed and cannot support nor deny the existence of the PHH This fact leads to opposing arguments about the impacts of FDI on the environment of host countries. Ben Kheder and Zugravu-Soilita (2008) studied the hypothesis by applying a geographic economy model on French firm-level data, the results confirm the existence of PHH for the global sample. Through sensitivity analysis, they validated the hypothesis for Central and Eastern European countries, emerging and high-income OECD countries, but not for the major part of the Commonwealth of Independent States countries. The purpose of the panel unit root test is to check the stationarity status of both variables in the model and to ensure that they are not integrated in order 2 or more since the results could be spurious and the ARDL approach becomes no longer applied (Omar et al, 2015)

Individual unit root

ARDL Bound test

Panel method

Findings

CONCLUSION