Income Heterogeneity and the Pollution Haven and Halo Hypotheses: Empirical Evidence from Developing Countries

Abstract

Foreign direct investment (FDI) is commonly perceived as a catalyst for fostering economic growth in recipient nations. Nevertheless, new research findings indicate that multinational corporations may employ a specific approach to exporting pollution from nations with rigorous environmental regulations to emerging countries with less stringent legislation. This research investigates the influence of FDI on the environmental conditions of 80 developing nations from 2000 to 2019. The study employs the Least Squares Dummy Variable Corrected (LSDVC) methodology to analyse the data. The findings suggest that there exists a direct correlation between the influx of FDI and the occurrence of environmental contamination within developing nations. Nevertheless, it has been shown that there exists a noteworthy positive correlation between FDI and environmental deterioration, specifically in the case of nations classified as upper-middle-income nations. Furthermore, the findings substantiate a noteworthy correlation between the deterioration of the environment and the expansion of the economy, FDI, energy consumption, and population density. The findings of this study provide empirical support for the presence of both the Pollution Haven Hypothesis (PHH) and the Environmental Kuznets Curve (EKC) in middle-income nations. Additionally, this study offers recommendations aimed at assisting developing countries in their efforts to address environmental degradation.