Investigating the Relationship Between FDI and the Environment in OECD Countries: A Sectoral Approach

Abstract

Over the last two or three decades increasing and ever accelerating trends of environmental degradation have been recorded and widely reported in a number of international scientific works. As is often claimed, this situation is particularly attributable to globalization and the widespread increase of economic activities. The recognition that FDI represents a relevant part of globalization raises various concerns. However, its environmental implications are not easy to identify and this gives rise to complex arguments and contradictory views.
This work aims to give a modest contribution to the scientific reflection on the FDI-environment relationship and is structured as follows. The first chapter introduces the main aspects of FDI and identifies the links characterizing its relationship with the natural environment. The second chapter provides a literature review. The third chapter is entirely dedicated to the empirical analyses which attempt to go beyond what is done in the literature. In fact, in addition to a major interest in trade, a particular orientation to develop analyses on national aggregated data is generally observed. Our work, instead - and this might be perceived as its original contribution - investigates the mentioned relationship at the level of specific activity sectors. Through the use of the econometric technique of panel data, a purpose-built dataset is investigated to mainly observe the effect that FDI inflowing in the "agriculture and fishing", the "manufacturing" and the "transport and communication" sectors of the OECD countries generates on the level of some considered pollutants. More specifically, the analysis of the "agriculture and fishing" sector focuses on both the FDI-CH4 (over the period 1990-2005) and FDI-CO2 from the sectoral fuel combustion (over the period 1981-2005) relationships. The "manufacturing" and "transport and communication" sectors are analysed only on the basis of the FDI-CO2 from the sectoral fuel combustion relationship (over the period 1981-2005). Two final chapters are respectively dedicated to the concluding discussion and policy considerations of the work.
The results of our analyses, expressed in terms of cumulative effects, show that when the investigation of the "agriculture and fishing" sector is made to observe the CH4-FDI relationship, the coefficient results equal to + 0.0427 + 0.0018 FDI, this showing the increase of Methane emission when FDI grows by 1%. When the "agriculture and fishing" sector is analysed in relation to the CO2-FDI relationship, the cumulative effect coefficient becomes equal to - 0.0848 - 0.0036 FDI, this representing the response of CO2 as a result of 1% growth of FDI. The cumulative effect coefficient for the "manufacturing" sector is equal to + 0.0058 + 0.0014 FDI which represents the increase of the sectoral CO2 from fuel combustion when FDI grows by 1%. Finally, the coefficient of the cumulative effect for the "transport and communication" sector is found equal to + 0.0027 + 0.0014 FDI, this representing the growth of the sectoral CO2 from fuel combustion as a result of a 1% increase of FDI.
If the inflow of FDI in each sector is considered at the sample mean value, then for "agriculture and fishing" an actual cumulative impact of +0.0213 is observed for the CH4-FDI and another of -0.0436 for the CO2-FDI relationship. An actual cumulative impact equal to +0.0051 is observed for the CO2-FDI relationship in the "manufacturing" sector and another of +0.0022 for the CO2-FDI in the "transport and communication" sector (values in natural logarithm of CO2 in Mt).
Apart from the interpretation of the algebraic signs, which would make us say that FDI is beneficial to the environment when the sign of the identified effect is negative and vice-versa, it is worth underlining how a closer look at the quantitative aspect of our results would allow us to highlight the nearly-zero value and the almost neutral role that FDI exerts on the considered environmental indicators. This is also confirmed by the very small and almost quantitatively insignificant results achieved from assessing the impact FDI exerts on the considered pollutants through GDP. With regard to the "agriculture and fishing" sector, the impact of FDI on CO2 through GDP cannot be identified due to the insignificant result achieved in the estimation of the CO2-GDP relationship. Apart from this, however, an outcome equal to -0.0003 is observed when the impact of FDI inflowing in the "agriculture and fishing" sector on CH4 is assessed through GDP (with FDI and GDP considered at their sample mean value respectively). Similarly, a result of +0.00002 is observed when assessing the impact of FDI on CO2 through GDP in the manufacturing sector and another of +0.0006 when the "transport and communication" sector is made the subject of attention (values in natural logarithm of CO2 in Mt).