FDI and Pollution – a Granger Causality Test using Panel Data

Nottingham University Business School
Journal of International Development (Impact Factor: 0.88). 04/2005; 17(3). DOI: 10.1002/jid.1196
Source: RePEc


This study reports the findings of Granger causality tests on the relationship between FDI and pollution across 112 countries over 15-28 years. Our results uncover alternative causality relationships between the two variables depending on a host country's level of development.

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    • "Furthermore, the study also suggested that energy-intensive industries partake of FDI more due to the relaxed environmental laws. Hoffmann et al. (2005a) tested the direction of causality between FDI and environmental pollution in low-, middle-, and high-income countries globally. The following results reject the PHH: (1) the unidirectional causality runs from FDI to energy emissions in middle-income countries, (2) a Granger causality between FDI and CO 2 emissions is observed in low-income countries, and (3) both variables exert neutral effects in high-income countries. "
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    ABSTRACT: Under a multivariate framework, this paper aims to investigate the nonlinear correlation between foreign direct investment and environmental degradation for high-, middle-, and low-income countries with economic growth and energy consumption as additional determinants of environmental degradation. All variables were found to be nonstationary and cointegrated based on recent panel data unit-root tests and cointegration techniques. On applying fully modified ordinary least squares (FMOLS), the long-run results suggest the presence of an environmental Kuznets curve. In turn, foreign direct investment increases environmental degradation, thus confirming the pollution haven hypothesis (PHH). Moreover, the bidirectional causality between CO2 emissions and foreign direct investment is observed globally. The findings are sensitive to different income groups and regional analyses. In particular, these empirical findings aid sound economic policymaking for improving environmental quality and sustainable economic development.
    Energy Economics 08/2015; 51:275-287. · 2.54 Impact Factor
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    • "In this type of studies, the evidence of a pollution haven a¤ect is quasi non-existent (Ratnayake and Widewald (1998), Smarzynska and Wei (2001), Eskeland and Harrison (2003), Mihci et al. (2005), Koop and Tole (2008)), although recent studies …nd a signi…cant PHE (Sparatenu (2007), Dam and Scholtens (2008)). In order to validate the pollution haven e¤ect, Ho¤mann et al. (2005) study whether FDI / pollution Granger cause pollution / FDI using new techniques in Granger causality with short time series and panel data. Their results suggest that a pollution haven e¤ect is more likely to happen in low-income host countries. "
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    ABSTRACT: This paper investigates if differences in environmental regulations can influence FDI flows in a multi-country setting taking into account the so-called "third-country" effects. We examine bilateral FDI flows using a new extended OECD investment database which covers great number of host countries and a long sample period (1981-2005). The findings based on a spatial gravity-like model are largely plausible across specifications and confirm the existence of a negative relationship between FDI and environmental stringency, once we correct for endogeneity and spatial dependence. The evidence of a positive "third-country" effect for FDI suggests the prevalence of complex FDI from developed to developing countries. The spatial structure of the model allows also to underline the possible existence of competition in environmental standards between countries to attract FDI.
    SSRN Electronic Journal 05/2008; DOI:10.2139/ssrn.1292705
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    • "Because of its suitability to our data sets, in which we have a short panel in time with a large number of cross-section units, we apply the approach proposed by Hurlin and Venet (2001), Hurlin (2004a, 2004b), used for example by Hoffman et al. (2005); Hansen and Rand (2004) or Erdil and Yetkiner (2009), treating the autoregressive coefficients and regression coefficient slopes as constants in time, but different across countries. In short panels, the fixed effects (FE) estimator of the coefficients of lagged endogenous variables is biased and inconsistent (Nickell 1981). "
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    ABSTRACT: To test potential bilateral causalities relation between HIV-AIDS mortality and GDP, we propose a simple Granger noncausality test for heterogeneous panel data models. 44 African countries are selected for annual pooled data from 1990 to 2009. Results are presented for the heterogeneous noncausality hypothesis (HENC), which tests, for each cross-section unit, the nullity of all the coefficients of the lagged explanatory variable. Bilateral causality relation is observed for 5 countries out of 44 (11% of the countries in our data set). We have 18 countries of unidirectional causality, which 14 are from HIV mortality rate to GDP (43% from total), and 4 are from GDP to HIV mortality rate (9% from total). These results alert for the risk of epidemic trap, initiated first by the deleterious effect of HIV-Aids on countries income.
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Robert Hoffmann