An empirical investigation of the Environmental Kuznets Curve from an international economics perspective : does the origin of FDI matter?

The Environmental Kuznets Curve (EKC) is a hypothesis of an inverted U-shaped relationship between environmental damage and income of a country, which means pollution tends to get worse as economic growth takes place, then starts to improve at a turning point over the course of development. Despite its complexity and controversy, the theory underlined by the EKC has been widely employed in empirical research on different economic elements in their relationship with growth and pollution. This research applies the EKC model to achieve two purposes: testing the EKC hypothesis and studying the environmental impacts of FDI (from developed and developing partners) and trade, the two important physical aspects of globalization. The most interesting question inspired the research is whether the origin of FDI affects environmental quality of host countries through the EKC. In the panel of 51 developed and developing countries and the subpanel of 23 developing economies for the period from 2001 to 2012, the two-way fixed effect econometric model verifies the EKC’s existence. Furthermore, the country-of-origin factor of FDI, which is largely ignored in the literature, is proved to be important to understand the impact of international investment on the environment. FDI from developed countries shows robust halo effect which reduces carbon dioxide emissions through technology transfer and development. Whereas, developing-country FDI and trade openness are associated with more polluting economic activities. However, the model does not capture the pattern of developed country subpanel, which requires further research. The findings deliver important policy implications to national governments, especially in developing countries, and critical input to the international discussions on the linkage between environment and cross-border flows of capital and goods.

Environmental Kuznets Curve

EKC

environment

growth

sustainable development

sustainability

FDI

trade

halo

pollution havens