Food and the forest: A spatial analysis on the nexus between foreign direct investment and deforestation

Abstract

This study examines the effect of foreign direct investment (FDI) on deforestation in non-OECD countries, in consideration of the potential trade-offs between economic objectives and environmental concerns and the pollution haven hypothesis. The study applies a multilevel fixed effects estimator to an original panel dataset of more than 4500 locations that received FDI across 120 countries between 2003 and 2019 and considers the sectors and sub-sectors of investment projects to examine heterogeneous land intensity in agricultural and food activities. Three main conclusions emerge. First, the food sector is primarily responsible for FDI-driven forest loss, while FDI projects in other sectors do not seem to significantly contribute to deforestation. Second, forest loss induced by food FDI is driven by specific sub-sectors; in particular, FDI projects in the food trade and services sub-sector seem to be significant, which is likely attributable to increased demand for local agricultural production. Third, animal industry FDI has the most significant impact on forest loss where the forest land cover is dominant.