A frequently-raised issue about foreign direct investment (FDI) is the potentially negative consequences for the environment. The potential environmental cost resulting from increased emissions may undermine the economic gains associated with increases in FDI inflow. Although the literature is dominated with this adverse view of FDI on the environment, there is a possibility that FDI can contribute to a cleaner environment, especially, if FDI comes with green technologies and this creates spillovers for domestic industries.
Theoretically, the effect of FDI on the environment can be negative or positive. To deal with the theoretical ambiguity about the FDI-environment nexus, many empirical studies have been conducted but their results only reinforce the controversy as they produce contrasting results. This paper contributes to the debate by synthesizing the literature to determine whether FDI is good or bad for the environment. We conduct a meta-analysis of the effect of FDI on environmental emissions using 65 primary studies that produce 1006 elasticities. Our results show that the underlying effect on environmental emission is close to zero, however, after accounting for heterogeneity in the studies, we find that FDI significantly reduces environmental emissions.
Among several key policy recommendations, a general policy implication of the study is that environmental policies should not be uniform for all countries. Environmental policies must be country- and pollutant-specific in order to solve the nature of environmental problem that a country faces. A well-designed environmental policy should reflect the specific needs of a country, taking into consideration the country’s level of economic development as well as specific environmental pollutants.
