The Welfare Effects of Opening to Foreign Direct Investment in Polluting Sectors

Gregmar Galinato (), Tim Graciano and Xin Zhao

No 205092, 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California from Agricultural and Applied Economics Association

Abstract: This article shows how policies to attract foreign direct investment (FDI) in a polluting sector affect home-country welfare relative to the autarky case. We consider a welfare maximizing country who attracts FDI into a polluting sector, while accounting for environmental quality changes. The government sets the level of environmental regulation and public infrastructure. Foreign investors prefer good infrastructure quality and less environmental regulation. We show that under autarky, environmental regulations are increasing over infrastructure. However, with FDI, optimal environmental regulations may be a subsidy if the benefits from a wage increase outweigh the damages from pollution. Also, we find that if a country has very poor levels of infrastructure it is better off not allowing FDI to enter but as infrastructure quality increases, the result is reversed where welfare with FDI is higher than under autarky.

Keywords: Environmental Economics and Policy; International Relations/Trade; Resource/Energy Economics and Policy (search for similar items in EconPapers)
Pages: 2
Date: 2015
New Economics Papers: this item is included in nep-ene, nep-env and nep-int
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https://ageconsearch.umn.edu/record/205092/files/2015_AAEA_WAEA_poster.pdf (application/pdf)

Related works:
Journal Article: The Welfare Effects of Opening to Foreign Direct Investment in Polluting Sectors (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea15:205092

DOI: 10.22004/ag.econ.205092

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