Environmental effect of Chinese FDI in Africa: Evidence from pooled mean group

Abstract

The growth of the China‐African economic relationship has received much attention among the scholars. Africa and China have experienced cooperation in the areas of foreign direct investment, cross‐border trade, and foreign aids. While this economic relationship has been viewed to contribute to the development of African nations, some scholars are of the opinion that it is a new practice in imperialism. Surprisingly, none of these scholars has examined the environmental effect of Chinese foreign direct investment (CFDI) in African regions. On this note, this study investigates how Chinese foreign direct investment (CFDI) has altered environmental conditions in sub‐Saharan Africa (SSA). The study uses the pooled mean group panel estimation procedure to control for short‐run heterogeneity and long‐run homogeneity in the absence of cross‐sectional dependence for the period 2003–2020, focusing on 22 countries in the region that have seen a substantial increase in foreign investment from China. CFDI is shown to decrease CO2 emissions in the long term, lending credence to the pollution halo hypothesis. Furthermore, short‐term averages show that CFDI increases CO2 emissions, lending credence to the pollution haven hypothesis. However, the short‐term results showed substantial variation on how CFDI affects CO2 emissions. The research shows that short‐term CFDI is associated with reduction in CO2 emissions in Burundi and Rwanda but increases them in the Congo Republic, Gabon, and South Africa. Some policy suggestions based on the results are offered.