Relationsheep between Foreign Direct Investment and Environment

During recent decades, in the literature of environmental economics along with economic effects and knowledge spillover’s FDI, the relation between foreign direct investment and the quality of environment has been a topic of considerable importance. In these studies it is assumed that in the globalization conditions, the existence of relax environmental regulations in developing countries have become an interesting comparative advantage for inflow of polluting foreign capital. These discussions have led to the formation of pollution haven hypothesis. The hypothesis points to the fact that developing countries especially those active in polluting industries, mainly tend to export polluting industries to those countries which have weaker environmental standards. In this respect the main objective of this research is to explore the relation between FDI and quality of environments that is, to test pollution haven hypothesis. To do so, first countries are divided in terms of development into three groups: high income, middle income and low income countries. Then using a simultaneous model based upon panel data and generalized moment method (GMM) for period 1991-2002, direct and indirect effect of direct foreign investment upon the quality of environment through three channel, direct effect, production scale effect and the effect of industrial combination in host country has been explored. Finally, the results show that the pollution haven hypothesis in countries with middle and low income, as developing countries, is confirmed and inflow of FDI in developed and developing countries has different effects upon the quality of environment ones. JEL: Q56,Q23,C33