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Foreign direct investments, environmental externalities and capital segmentation in a rural economy

Angelo Antoci, Simone Borghesi (), Paolo Russu () and Elisa Ticci ()

Ecological Economics, 2015, vol. 116, issue C, 341-353

Abstract: This paper examines the possible effects of external investment inflows on the development of local rural economies, taking into account two recurrent features of many developing countries: capital market segmentation and environmental externalities. To investigate this issue, we examine a model with two sectors: the “local sector” and the “external sector”. Physical capital accumulation in the latter sector is driven by foreign direct investments, while in the former sector it follows a Solow-type accumulation mechanism. We assume that the production activity of the external sector damages the environment while the local sector relies on natural resources. In this context, we give the conditions under which capital inflows can promote diversification of host economy while improving welfare of local populations. If these conditions are not satisfied, external investments fuel a welfare reducing process (for the local community) and a self-enforcing growth of the external sector at the expense of the local one.

Keywords: Two-sector model; Foreign direct investments; Environmental negative externalities; Self-protection choices; Structural change (search for similar items in EconPapers)
JEL-codes: F21 F43 D62 O11 O13 O15 O41 Q20 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:116:y:2015:i:c:p:341-353

DOI: 10.1016/j.ecolecon.2015.04.029

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