A sectoral analysis of the role of Foreign Direct Investment in pollution and energy transition in OECD countries

Abstract

The sustainable development agenda has been driving the global debate on environmental policy for several years now. Developed countries have stricter environmental controls and are under pressure from international agencies to cut pollution. However, many of these countries have been accused of using Foreign Direct Investment to shift their environmental burden to countries with lower environmental restrictions, rather than reducing their overall environmental impact. Should developed countries continue to transfer their emissions? What role does the energy structure of recipient countries play in this investment? A Panel Autoregressive Distributed Lag Model was carried out for a set of 15 OECD countries, from 2005 to 2018. The main findings upheld the Pollution Halo hypothesis. However, they also confirmed the Pollution Haven hypothesis, which was unexpected for developed countries, with their higher environmental standards. It seems that Foreign Direct Investment may increase pollution by increasing overall energy consumption, rather than by transferring polluting industries. Foreign Direct Investment inflows seem to be more environmentally friendly than inward stock, particularly in the electricity and services sectors. Energy transition could be achieved without the polluting effect of Foreign Direct Investment. Investment in the electricity sector may be a way of decoupling economic growth from pollution.