The Effects of Foreign Direct Investment on Environmental Quality in West Africa

Abstract

Foreign direct investment (FDI) has played a key role in the growth and development of developing economies. However, one prominent opposing question about foreign direct investment is whether it is a blessing or a curse to the natural environment of the host country. While some argue that the positive spillover of FDI especially through green technologies improves the natural environment of the host country, opponents argue that it deteriorates the natural environment through an increase in carbon dioxide emissions level of the host country. Despite the existing theoretical ambiguity on FDI-environmental quality nexus in West Africa, few studies conducted in the area have also not considered all the sixteen West African Countries. Again, these studies did not extend the argument to cover the pollution haven hypothesis to determine whether emission in the sub-region is attributed to domestic industries or pollution-induced multinational companies. This research examined the effect of foreign direct investment (FDI) on environmental quality in West Africa and also test empirically the existence of the pollution haven hypothesis. Using carbon dioxide emission as a proxy for environmental quality, this study employed the random effect model on ten-year panel data from 2005 to 2014 from all the sixteen countries in West Africa. The study revealed that foreign direct investment has a positive and significant impact on the environment which confirms that FDI is detrimental to the natural environment in West Africa Again, the study proved empirically that carbon dioxide emission in West Africa is attributed to the influx of multinationals into the sub-region. Thus, validating the pollution haven hypothesis (PHH). Inasmuch as FDI is encouraged in West Africa, environmental standards in the sub-region should be strengthened to regulate its effect on the natural environment.