Foreign Direct Investment and Environmental Quality: Revisiting the EKC in Latin American Countries

Abstract

In this study we aim to test the effects of foreign direct investment (FDI) on carbon emissions (CO2) in 20 Latin American countries during the period of 1990–2018. Based on the atlas method of the World Bank, we divided the countries into three groups according to their real gross national income per capita: high-income, upper-middle-income and lower-middle-income countries. We used cointegration techniques and causality tests to evaluate the relationship between the variables. To assess the strength of the cointegration vector, we applied the dynamic ordinary least squares (DOLSs) model for individual countries and the dynamic panel ordinary least squares (PDOLSs) model for groups of countries. The results suggest that the entry of FDI into Latin American (LA) countries increases CO2 emissions, affecting the environmental quality. These findings disagree with the environmental Kuznets curve (EKC) hypothesis but, in contrast, they are in line with the pollution haven hypothesis (PHH). Moreover, we show evidence in long-term equilibrium relationship between FDI input and CO2 emissions, which is not the case for the short-term equilibrium. Some additional results suggest that FDI flows do not cause the CO2 emissions in LA countries. The empirical findings suggest policymakers to design policies to “the second-best theory”, targeting FDI flows to their economies to solve economic problems in the short term, but thereafter they may guarantee the reduction in environmental pollution, based on environmentally responsible FDI and stronger regulations. In other words, the transition from a pollution haven to the applicability of the environmental Kuznets curve (EKC). This study contributes with scarce empirical evidence for LA countries in this issue.

Asymmetric effect of renewable energy consumption and economic growth on environmental degradation in sub-Saharan Africa

“…In addition, FDI is included in the model to avoid the problem of omitted variable bias. The incorporation of FDI in the framework is in line with previous works (Demena and Afesorgbor, 2020;Ren et al, 2021;Ochoa-Moreno et al, 2021;Minh, 2020;Hou et al, 2021;Guoyan et al, 2021).…”

Evaluation of the environmental Kuznets curve hypothesis in a tourism development context: evidence for 15 Latin American countries

“…The methodology used also made it possible to determine the existence of equilibrium in the short run (Westerlund, 2007) and long run (Pedroni, 1999, 2004). Research such as Ochoa‐Moreno et al (2021) and Ehigiamusoe et al (2020) use similar methodological processes to find equilibrium relationships, in different study samples. The results indicate that tourism revenues and CO 2 emissions per capita have a joint and simultaneous movement during the period 1995–2018 in all groups of countries, according to income level.…”

How do FDI inflows curvilinearly affect carbon emissions? Threshold effects of energy service availability and cleanliness

“…If the host country sets stringent formal environmental regulations and implements them effectively, high‐pollution and high‐emission FDI will not be able to enter (Sun, Liu, & Chen, 2020). Moreover, FDI that has already entered will be gradually withdrawn if it cannot withstand high‐intensity environmental regulations (Ochoa‐Moreno, Quito, & Moreno‐Hurtado, 2021). Meanwhile, low‐intensity environmental regulations will lead to PHH (Khan & Qiu, 2020).…”