Improving the environment begins at home: Revisiting the links between FDI and environment

Abstract

This article revisits the debate over whether FDI inflows are detrimental or beneficial for the host country’s environment by examining the effects of FDI originating from developed and developing countries on the overall environmental quality of 76 countries over the 2002–2012 period. The environmental performance index has been employed as the key explanatory variable in the fixed effects estimation for the empirical analysis of three groups of countries. Our results suggest that FDI originating from developed countries improves the overall environmental performance of the low- and lower-middle-income and high-middle income host countries. Whereas, FDI from the developing countries is harmful to the environmental performance of the low- and lower-middle-income host countries. We conclude that it is not the policy environment of the host country, but that of the source country that determines the positive/adverse effects of FDI on the environmental performance of a host country. This important distinction should be made while designing policies to tackle the adverse environmental impact of FDI inflows. Therefore, adversely affected countries should implement stricter environmental standards on FDI coming from developing countries.