The impact of foreign direct investment on CO2 emissions considering economic development: Evidence from South Korea

Abstract

This study investigates the relationship between foreign direct investment (FDI) inflows and CO2 emissions in Korea, applying the autoregressive distributed lag model. Specifically, we test the impact of FDI on CO2 emissions based on Korea’s level of economic growth, using yearly data from 1971 to 2015. Our results show that, in the long run, FDI inflows positively affect CO2 emissions. However, the absolute size of the positive effect decreases with an increase in income. Eventually, the effect of FDI inflows changes from positive to negative, increasing the GDP per capita, in the long run. Thus, while the pollution haven hypothesis is satisfied at a lower income level, the pollution halo hypothesis becomes applicable at a higher income level. For Korea, the optimal policy strategy at the current income level, is to maximize FDI inflows. Our results also imply that a policy promoting FDI inflows to developed countries, is beneficial both economically and environmentally. Meanwhile, policymakers in developing countries should adopt a balanced policy for FDI inflows, considering their negative effects on the environment and positive effects on economic growth.