The Dual Impact of FDI on Environmental Quality in Host Countries: A Study on the Heterogeneity of Effects in Developing and Developed Nations

Abstract

This study examines the dual impact of Foreign Direct Investment (FDI) on environmental quality in host countries, differentiating between developing and developed nations. Linear regression analysis of income-segmented data reveals that FDI reduces greenhouse gas emissions globally but increases pollution in middle-income countries while reducing it in high-income countries. Robustness checks validate these findings. FDI's environmental impacts vary with the host country's regulatory environment and development status. Positive impacts include advanced technology transfer and improved resource efficiency, while negative impacts involve the "pollution haven" effect and resource over-exploitation by foreign investors. To maximize benefits and minimize drawbacks, host governments should provide incentives for environmentally friendly investments, promote knowledge exchange, and enforce robust environmental regulations with clear policies and self-reporting mechanisms. These strategies can help host countries harness FDI's advantages while mitigating its environmental risks.