Foreign Direct Investment and Environmental Quality: Revisiting the EKC in Latin American Countries

Wilman Ochoa, Byron Alejandro Quito and Carlos Andrés Moreno-Hurtado
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Byron Alejandro Quito: Department of Economics, School of Economics, Universidad Nacional de Loja, Loja 110111, Ecuador
Carlos Andrés Moreno-Hurtado: Department of Economics, School of Economics, Universidad Técnica Particular de Loja, Loja 110107, Ecuador
Authors registered in the RePEc Author Service: Carlos Andrés Moreno Hurtado

Sustainability, 2021, vol. 13, issue 22, 1-18

Abstract: In this study we aim to test the effects of foreign direct investment (FDI) on carbon emissions (CO 2 ) in 20 Latin American countries during the period of 1990–2018. Based on the atlas method of the World Bank, we divided the countries into three groups according to their real gross national income per capita: high-income, upper-middle-income and lower-middle-income countries. We used cointegration techniques and causality tests to evaluate the relationship between the variables. To assess the strength of the cointegration vector, we applied the dynamic ordinary least squares (DOLSs) model for individual countries and the dynamic panel ordinary least squares (PDOLSs) model for groups of countries. The results suggest that the entry of FDI into Latin American (LA) countries increases CO 2 emissions, affecting the environmental quality. These findings disagree with the environmental Kuznets curve (EKC) hypothesis but, in contrast, they are in line with the pollution haven hypothesis (PHH). Moreover, we show evidence in long-term equilibrium relationship between FDI input and CO 2 emissions, which is not the case for the short-term equilibrium. Some additional results suggest that FDI flows do not cause the CO 2 emissions in LA countries. The empirical findings suggest policymakers to design policies to “the second-best theory”, targeting FDI flows to their economies to solve economic problems in the short term, but thereafter they may guarantee the reduction in environmental pollution, based on environmentally responsible FDI and stronger regulations. In other words, the transition from a pollution haven to the applicability of the environmental Kuznets curve (EKC). This study contributes with scarce empirical evidence for LA countries in this issue.

Keywords: FDI; carbon emissions; EKC; pollution haven hypothesis; Latin America; environmental quality (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:13:y:2021:i:22:p:12651-:d:680193

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