FDI and CO2 Emissions in the ASEAN-5 and India

University essay from Lunds universitet/Ekonomisk-historiska institutionen

Abstract: With the tremendous increases in Foreign Direct Investment (FDI) in the last four decades arose the problem of a possible relationship between FDI and carbon dioxide (CO2) emissions. Scholars have hypothesized that international companies invest in countries with lax environmental regulations to escape high production cost, we call this the pollution haven hypothesis. The ASEAN-5, i.e. Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, as well as India are of particular interest as FDI is known for playing an important role in their economic development. However, a lack of studies using recent data in Southeast Asia became apparent. Hence, this study aimed at filling this gap. To achieve this goal, a structural break analysis and a Toda and Yamamoto causality test were conducted for the six countries. The findings were as follow: a relationship going from FDI to CO2 emissions for India, the reverse for Vietnam and the Philippines, a bidirectional relationship for Thailand, and finally, no relationship for Indonesia and Malaysia. As the relationship is very country-specific, any policy regarding FDI must be implemented with care and special attention should be paid to the transfer of technology as it is key for a positive impact of FDI.

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