TESTING THE POLLUTION-HAVEN HYPOTHESIS: EMPIRICAL EVIDENCE FROM CROATIA

Abstract

Background: The purpose of this study is to investigate the causal relationship between the foreign direct investment (FDI) and the environment with the aim to test the pollution- haven hypothesis in Croatia. The paper contributes to existing research which has been mainly focused on the impact of foreign direct investment on economic growth both at the global level as well as in Croatia. Methods: The study employs econometric techniques such as unit root test, Johansen co- integration and Granger and Toda-Yamamoto causality tests in Vector autoregressive model (VAR) using annual time series data from 1992 to 2013. A variable FDI has been obtained from the United Nations Conference on Trade and Development (UNCTAD). CO2 emission per capita is used as the proxy for environmental quality. A variable CO2 has been obtained from the World Bank. Both used variables are in logarithms. Results: The results do not confirm the existence of a stable co-integrated relationship between variables in the long run. The Granger causality test and the Toda- Yamamoto version of the Granger causality test show a one-way short run causality relationship running from CO2 to the foreign direct investment in Croatia. Conclusions: The causality relationship running from CO2 to the foreign direct investment supports the pollution haven hypothesis. Croatia is still less developed country and it is less able to find the money for costs of implementing and monitoring environmental rules. Weak environmental regulation in Croatia may attract the foreign direct investment by companies keen to bypass costly regulatory rules in their home countries.