Foreign direct investment vs. cross-border trade in environmental services with ethical spillovers: a theoretical model based on panel data

Abstract

ABSTRACT This paper develops a dynamic theoretical model based on empirical panel data to support decisions about whether favouring international environmental services that require ethical improvements, due to replicating behaviours or conforming to social pressures (e.g. waste management WM, organic farming OF, and energy conservation, EC), through either foreign direct investment (FDI) or cross-border trade (CBT) policy. The numerical simulations based on a dynamic model for the policy feasibility (i.e. whether there are realistic parameter values such that a policy can achieve its goal), and the statistical estimations based on panel data for the policy reliability (i.e. whether there is a strong relationship between a policy and its goal), suggest that there is no trade-off between effectiveness and efficiency. WM is promoted, but not reliably, by CBT, and some religious and secular ethics are crucial. In contrast, OF is promoted by neither FDI nor CBT, although some religious and secular ethics are important. EC is promoted, but not reliably, by FDI, and only a secular ethic is significant. Income and education (i.e. economic development) as well as the unemployed and elderly population (i.e. social status) have different effects on the dynamics and levels of WM, OF, and EC.