The Impact of Foreign Direct Investment on CO2 Emission

Abstract

In the literature, the impact of Foreign Direct Investment (FDI) on carbon dioxide (CO2) emissions is explained by two different hypotheses: Pollution Halo and Pollution Haven Hypothesis. While Pollution Halo hypothesis states that FDI provides advanced technology to countries and accordingly decreases CO2 emissions, Pollution Haven Hypothesis indicates that there is a positive relationship between FDI and CO2. In this regard, in this study, the impact of FDI on CO2 emissions in the selected 10 of G-20 countries in the period of 1970-2010 is investigated by using panel data analysis. The empirical findings show that panels have cross-section dependence and these two panels are stationary in different levels. Moreover, the existence of long term relationship between panels is found by using Durbin Hausmann panel cointegration test. The results of the study also show that while Pollution Halo Hypothesis is valid for USA, France and Argentina, Pollution Haven Hypothesis is valid for UK, Canada, Australia, South Africa, Italy, Mexico and Saudi Arabia.