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Could Private Investment in Energy Infrastructure soften the environmental impacts of Foreign Direct Investment? An assessment of developing countries

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  • Caetano, Rafaela Vital
  • Marques, António Cardoso
  • Afonso, Tiago Lopes
  • Vieira, Isabel

Abstract

When developed countries invest in developing countries there is often a trade-off between economic growth and environmental quality, but is this inevitable? Previous studies have concluded that one consequence of Foreign Direct Investment (FDI) is the transfer of polluting industries. However, there has been insufficient analysis of the pollutant consequence of this investment, as this may arise from the lack of renewable energy infrastructure to satisfy peaked energy demand. Using data from 17 developing countries from 2000–2020, this study undertakes an in-depth analysis of the effects of FDI and Private Participation in Energy Infrastructure (PPEI) investment on economic growth, pollution, and energy transition using a Seemingly Unrelated Regression model. The results reveal that FDI increases pollution and non-renewable energy consumption but, conversely, PPEI promotes energy transition, potentially mitigating the polluting impact of FDI. Developing countries can pursue long-term environmentally-sustainable economic growth by attracting private investment in their energy infrastructure.

Suggested Citation

  • Caetano, Rafaela Vital & Marques, António Cardoso & Afonso, Tiago Lopes & Vieira, Isabel, 2023. "Could Private Investment in Energy Infrastructure soften the environmental impacts of Foreign Direct Investment? An assessment of developing countries," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 961-977.
    • Handle: RePEc:eee:ecanpo:v:80:y:2023:i:c:p:961-977
    DOI: 10.1016/j.eap.2023.09.030
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    Keywords

    FDI; Infrastructure; Renewable energy; Energy transition; Pollution; PPI;
    All these keywords.

    JEL classification:

    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q27 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Issues in International Trade
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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