Foreign Direct Investment and Environment in Latin America: Sustainable Development Goals

Abstract

Foreign direct investment (FDI) inflows have been on an increasing trend since the beginning of the 1990s in Latin America. This increase was largely a result of the implementation of the Washington Consensus which led to structural reforms in most Latin American economies. Foreign direct investment was seen as an important instrument to stimulate economic growth, increase employment opportunities, and foster technological progress. In the same period, local pollutants such as carbon dioxide, nitrous oxide, and methane have also increased. Many reasons are behind these emissions, including population growth, economic growth, and increasing urbanization rates. However, there is less understanding about the impact that this increase in foreign direct investment has had on local pollution in Latin American countries. On the one hand, foreign direct investment can be a source of technological progress and associated adoption of cleaner technologies (a technique effect). On the other hand, foreign direct investment can adapt to local laxer environmental regulations and intensify pollution through the scale effect. Finally, foreign direct investment can bring in new industries and sectors, which are in less or more polluting sectors (a composition effect). Therefore, to provide an estimate of the impact of foreign direct investment on local pollution, this chapter controls additionally for the three types of effects by using data on foreign direct investment and combining with data from the World Bank on among others, emissions, population density, GDP per capita, trade openness, and human capital. Similar to other papers, this chapter employs panel data estimation for Latin American countries but performs the empirical analysis for a more recent period, 1990–2019. Our main results indicate that FDI has intensified CO2 emissions in Latin American countries. Finally, this chapter discusses the findings in light with the efforts by Latin American governments to achieve the Sustainable Development Goals by 2030.