The influence of foreign direct investments on environmental degradation in Eastern Europe
The aim of this paper is to explore the environmental impact of FDI on host economies in central and eastern Europe. In some cases FDI may be a vehicle of technology transfer which boosts environmentally friendly activities. In other cases, however, FDI may also be targeted at countries with inadequate environmental regulations or enforcement. These activities prolong the life cycle of established but environmentally unacceptable technologies. The notion that FDI leads to environmental degradation along with economic growth may be described as the “pollution haven hypothesis.” It is a variation on the broader economic theme of the “race to the bottom” through international competition.
To distinguish the positive impacts of FDI from its negative environmental consequences, this paper relies upon panel data for eighteen central and eastern European countries. We conclude that the environmental impact of foreign direct investments in these countries is a nuanced question, one whose answer depends on the type of pollution in question. This paper finds that FDI has a positive impact on environmental quality with respect to airborne pollutants. By contrast, the opposite is true for water pollution. This paper therefore contradicts the pollution haven hypothesis with respect to airborne pollution, even as it finds some evidence of a pollution haven with respect to water quality.