Does foreign direct investment impede environmental quality in Asian countries? A panel data analysis

• Author: Nisar Ahmed Khan,Mohd Arshad Ansari,Aadil Ahmad Ganaie
• Published date: 01 June 2019
• DOI: http://doi.org/10.1111/opec.12144
• Date: 01 June 2019

Does foreign direct investment impede

environmental quality in Asian countries? A

panel data analysis

Mohd Arshad Ansari*, Nisar Ahmed Khan** and Aadil Ahmad Ganaie*,***

*Research scholar, School of Economics, University of Hyderabad, Hyderabad, Telangana 500046, India.

Email: 16seph17@uohyd.ac.in; Email: aadilganaie@uohyd.ac.in

**Professor, School of Economics, University of Hyderabad, Hyderabad, Telangana 500046, India. Email:

drkhan58@gmail.com

***Lecturer Economics HSS, Damhall, Anantnag. J & K 192210, India. Email: aadilganaie77@gmail.com.

Abstract

This study aims to investigate the validity of the pollution haven hypothesis for the global panel

consisting of 29 countries (Bahrain, Israel, Jordan, Saudi Arabia, Turkey, United Arab Emirates,

Oman, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan, China, Japan, Mongolia,

Hong Kong, Korea rep, Bangladesh, India, Pakistan, Sri Lanka, Nepal, IR Iran, Indonesia, Malaysia,

Philippines, Singapore, Thailand and Vietnam are taken as the sample of this study) with energy

consumption, economic growth and trade openness as additional determinants of environmental

degradation over the period 1994–2014. To make the panel data analysis more homogenous, we also

investigate the validity of the PHH for a number of sub-panels. These sub-panels are constructed

based on the sub-regions of Asia. In this way, we end up with six Asian panels; namely, Global panel,

West Asia, Central Asia, East Asia, South Asia and Southeast Asian panels. Based on the IPS and

ADF chi-square unit root test and Pedroni cointegration test results, all variables were found to be first

difference stationary and cointegrated. On applying FMOLS, the long-run results suggest the presence

of the pollution haven hypothesis only in East Asian panel. In turn, foreign direct investment reduces

environmental degradation, thus rejecting the validity of the pollution haven hypothesis (PHH) in the

Southeast Asian panel which is found to be negatively linked to CO

2

emissions. Moreover, energy

consumption seems to be the main determinant of carbon emissions and GDP growth has a positive

impact on it in all panels except West Asia. Lastly, Eas t Asian countries have followed the Kyoto

protocol in order to reduce their emissions level.

1. Introduction

Foreign direct investment (FDI) worldwide has grown markedly since the 1970s,

reaching $1.76 trillion in 2015. According to UNCTAD Annual Report (2016),

JEL classification: Q5, N55, F01, F3, F43, C23, P28.

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109

developing Asia is now the largest recipient and accounts for almost one-third of total

FDI inflows. The economic diversification had become a main economic and political

priority in the Asian economies. This goal of economic diversification is initiated when

the Asian countries started to encourage foreign investors and private sectors to increase

their role in the Asian economies to accomplish more economic liberalisation. This new

economic policy opened a wider range of activities to foreign direct investment (FDI),

(World Investment Report, 2016) which helped in inclusive economic growth and

integration by enhancing total factor productivity through technological and knowledge

spillovers through physical and human capital accumulation which contributes directly

to economic growth, thereby facilitating economic development for capital starved and

technologically backwards developing countries. FDI inflows to developing Asia are

expected to increase by 15 per cent in 2017, as an improved economic outlook in major

Asian economies is likely to boost investor confidence in the region (World Investment

Report, 2016) since they are moving towards more economic liberalisation. Presently,

global FDI has become especially challenging; many investors are forced to hold their

investments in the Middle East and the Asia Pacific. Moreover, by allowing economies

to link to global and regional value chains, FDI potentially facilitates regional integration

an export-oriented development strategy that many in Asia have followed successfully.

Foreign direct investment is an important source of capital which can enhance

technological transfer to the host countries and stimulate economic growth and

development.

In general, FDI has the following three important effects on the host country

economy: (i) (Bosworth et al., 1999) filling the gap between targeted investment and

domestic savings (ii) (Alfaro, 2003) boosting said country’s development efforts (iii)

(Bustos, 2007), offering itself as a source of external capital. Furthermore, FDI can also

aid innovative learning may provide direct capital financing; generate positive

externalities such as a mixture of technical skills which consequently stimulate

economic growth, through technology transfer, productivity gains spillover effects and

the introduction of new processes (Lee, 2013). Copeland and Taylor (1994), Cole (2004)

finds that developing countries tend to undermine environmental concerns through

relaxed or non-enforced regulation, which is termed as pollution haven hypothesis

(PHH).

Rapid industrialisation has led to increasing environmental concerns, such that the

links between foreign investment and environment pollution have been intensely

debated. Some studies (e.g. Kirkulak et al., 2011; Atici, 2012; Lan et al., 2012) found

that FDI inflows can reduce pollution by transferring environment friendly technologies

from developed to less or weak developed countries, while some other studies (e.g. Cole

and Elliott, 2005; Cole et al., 2006; Wang et al., 2013) found that FDI inflows have a

positive effect on pollution. This positive relationship between FDI and carbon

OPEC Energy Review June 2019 ©2019 Organization of the Petroleum Exporting Countries

110 Mohd Arshad Ansari, Nisar Ahmed Khan and Aadil Ahmad Ganaie