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Foreign direct investment, environmentally sound technology and informal sector

Sarbajit Chaudhuri () and Ujjaini Mukhopadhyay

MPRA Paper from University Library of Munich, Germany

Abstract: The paper examines the linkages between foreign direct investment, informal sector and transfer of environmentally sound technology (EST) in a developing economy in terms of a three-sector, full-employment general equilibrium model with an informal sector that produces a non-traded input for the formal final good producing sector. The same input is produced by another division of the formal sector, which generates less pollution than the informal sector since the former uses a different type of capital that embodies EST. The formal sector has to pay a penalty in the form of a production tax for using the output of the excessively polluting informal sector. In this scenario, the analysis finds that foreign capital inflow in the formal sector may accentuate pollution, even if it involves transfer of EST. Secondly, there might exist a positive relationship between pollution and national income in the economy both in the presence and absence of transfer of EST. These results can at least question the desirability of transfer of EST and also give theoretical explanations behind the existence of a positively sloped segment in the Environmental Kuznets Curve.

Keywords: Pollution; foreign capital; environmentally sound technology; informal sector; formal sector; Environmental Kuznets Curve; general equilibrium (search for similar items in EconPapers)
JEL-codes: F18 O17 Q56 O33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env
Date: 2011-05-17
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Journal Article: Foreign direct investment, environmentally sound technology and informal sector (2013) Downloads
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