FDI and Environmental Convergence: Home country influence

Mercredi | 2022-03-03
B103 – 12h00

This study analyzes the existence and determinants of environmental convergence/divergence. We take a bilateral approach where one or more investor partners could use their influence to impact the environmental performance of their investment host country, and thus generate environmental convergence or divergence between home and host country. Based on a sample of 128 countries with bilateral data between 2000 and 2012, we show the existence of the environmental convergence/divergence phenomenon. Our results suggest that FDI does not directly impact environmental convergence/divergence, except for those from the most important investor partner countries. And, under certain conditions, FDI can be associated with either environmental convergence or divergence. These conditions, which are more related to the host country than to the country of origin, are: the level of economic, institutional, and financial development, the degree of openness, natural resources, the level of human capital, and the level of corruption. The factors that directly influence convergence/divergence are: the level of economic development, industrial development, energy use, spatial, geographic, cultural, and historical proximity, corruption, human capital, and natural resources. We find threshold effects between the environmental gaps between partners and the level of economic development (U-shaped relationship), industrial development (inverted U-shaped relationship), and urbanization. The phenomenon of environmental divergence (convergence) – bilateral or towards the mean – between two partners is associated with low (high) levels of economic development of both partners. On the other hand, the phenomenon of environmental convergence (divergence) between two partners is associated with low (high) levels of industrial development of both partners. The magnitude and effect of different factors may vary depending on the type of partnership considered (North-North, North-South, South-North, and South-South).