Foreign direct investment, environmentally sound technology and informal sector

Chaudhuri, Sarbajit and Mukhopadhyay, Ujjaini (2011): Foreign direct investment, environmentally sound technology and informal sector.

Abstract

The paper examines the linkages between foreign direct investment, informal sector and transfer of environmentally sound technology (EST) in a developing economy in terms of a three-sector, full-employment general equilibrium model with an informal sector that produces a non-traded input for the formal final good producing sector. The same input is produced by another division of the formal sector, which generates less pollution than the informal sector since the former uses a different type of capital that embodies EST. The formal sector has to pay a penalty in the form of a production tax for using the output of the excessively polluting informal sector. In this scenario, the analysis finds that foreign capital inflow in the formal sector may accentuate pollution, even if it involves transfer of EST. Secondly, there might exist a positive relationship between pollution and national income in the economy both in the presence and absence of transfer of EST. These results can at least question the desirability of transfer of EST and also give theoretical explanations behind the existence of a positively sloped segment in the Environmental Kuznets Curve.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pollution, foreign capital, environmentally sound technology, informal sector, formal sector, Environmental Kuznets Curve, general equilibrium
• Subjects: F - International Economics > F1 - Trade > F18 - Trade and Environment; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O33 - Technological Change: Choices and Consequences ; Diffusion Processes

References

Almeida de, L. T., Rocha, S. S., 2008. Beyond pollution haloes: the environmental effects of FDI in the pulp and paper and petrochemicals sectors in Brazil. Working Group on Development and Environment in the Americas, Discussion Paper No. 17.

Barrett, S., Graddy, K., 2000. Freedom, growth, and the environment. Environment and Development Economics. 5(4), 433-56.

Beckerman, W., 1992. Economic growth and the environment: whose growth? whose environment? World Development, 20, 481-496.

Beladi and Marjit (1992), Foreign Capital and Protectionism. Canadian Journal of Economics, 25, 233-238.

Bose, A. N., 1978. Calcutta and rural Bengal: small sector symbiosis. Minerva Publications. New Delhi.

Brecher, R.A., Alejandro, C.F.D., 1977. Tariffs, foreign capital and immiserizing growth. Journal of International Economics 7, 317–322.

Cagatay, S., Mihci, H., 2006. Degree of environmental stringency and the impact on trade patterns. Journal of Economic Studies. 33 (1), 30-51.

Chandra, V., Khan, M. A., 1993. Foreign investment in the presence of an informal sector. Economica. 60, 79–103.

Chaudhuri, S., 2001. Foreign capital inflow, technology transfer, and national income. Pakistan Development Review. 40(1), 49-56.

Chaudhuri, S., Mukhopadhyay, U., 2009. Revisiting the Informal Sector: A General Equilibrium Approach, Springer, New York, U.S.A.

Chaudhuri, S., Mukhopadhyay, U., 2006. Pollution and informal sector: a theoretical analysis. Journal of Economic Integration. 21(2), 363- 378.

Dietzenbacher, E., Mukhopadhyay, K., 2007. An empirical examination of the pollution haven hypothesis for India: towards a green Leontief paradox? Environmental and Resource Economics. 36 (4), 427-449.

Dominguez, V. L., 1998. Control de la contaminación en la industria de fibras químicas en un contexto de apertura económica. Paper presented at Latin American Studies Association XXI International Congress, Chicago, September.

Eskeland, G.S., Harrison, A.E., 2003. Moving to greener pastures multinationals and the pollution haven hypothesis. Journal of Development Economics. 70 (1), 1-23.

Grinols, E. L., 1991. Unemployment and foreign capital: the relative opportunity cost of domestic labour and welfare. Economica. 57, 107–21.

Grossman, G. M., Krueger, A. B., 1995. Economic growth and the environment. Quarterly Journal of Economics. 112 (2), 353-378.

Gupta, M.R., 1997. Foreign capital and informal sector: comments on Chandra and Khan. Economica. 64, 353–363.

Harris, J.R., Todaro, M. P., 1970. Migration, unemployment and development: a two -sector analysis. American Economic Review. 60, 126-42.

He, J., 2006. Pollution haven hypothesis and environmental impacts of foreign direct investment: The case of industrial emission of sulfur dioxide (SO2) in Chinese provinces. Ecological Economics. 60 (1), 228-245.

Jenkins, R., 1999. Trade, investment and industrial pollution: a Malaysia case study with some Mexican comparisons. IKMAS Working Paper.

Jha, V., Teixeira, A. P., 1994. Are environmentally sound technologies the emperor’s new clothes? Discussion Papers No. 89, UNCTAD, Geneva.

Joshi, H., Joshi V., 1976. Surplus labour and the city: a Study of Bombay. Oxford University Press. New Delhi.

Juma, C., 1994. Promoting international transfer of environmentally sound technologies: the case for national incentive schemes, in: Bergesen, H. O., Parmann, G. (Eds.), Green Globe Yearbook of International Co -operation on Environment and Development. Oxford University Press, pp.137–148.

Khan, M. A., 1982. Tariffs, foreign capital and immiserizing growth with urban unemployment and specific factors of production. Journal of Development Economics. 10, 245–56.

Less, C. T., McMillan, S., 2005. Achieving the successful transfer of environmentally sound technologies: trade- related aspects. OECD Trade and Environment Working Paper No. 2005-02.

Levy, D., 1995. The environmental practices and performance of transnational corporations. Transnational Corporations. 4(1), 44-68.

López, A., Chidiak, M., 1996. La industria petroquímica, in: Chudnovsky D. et al, Los límites de la apertura. Liberalización, restructuración productiva y medio ambiente, CENIT/Alianza Editorial, Buenos Aires.

Luken, R., Rompaey, F. V., Zigová, K., 2008. The determinants of EST adoption by manufacturing plants in developing countries. Ecological Economics. 66, 141-152.

Merican, Y., Yusop, Z., Noor, Z. M., Hook, L. S., 2007. Foreign direct investment and the pollution in five ASEAN nations. International Journal of Economics and Management, 1 (2), 245–261.

Papola, T. S., 1981. Urban informal sector in a developing economy. Vikas Publishing House. New Delhi.

Perrings, C., Bhargava, S., Gupta, J., 1995. The transfer of environmentally sound technology to small and medium scale enterprises in developing countries: a survey of the issues. Paper prepared for UNCTAD, Geneva.

Rock, M.T., 2002. Pollution Control in East Asia: Lessons from Newly Industrializing Economies. Resources for the Future. Washington D.C.

Romatet, E., 1983. Calcutta’s informal sector: theory and reality. Economic and Political Weekly. 18, 2115–28.

Sethuraman, S. V., 1981. The urban informal sector in developing countries: employment, poverty and environment. ILO, Geneva.

World Bank, 1992. World Development Report. Oxford University Press. New York.

Zarsky, L., 1999. Havens, halos and spaghetti: Untangling the evidence about FDI and the environment. Paper presented to OECD conference on Foreign Direct Investment and the Environment, OECD, Paris, January.