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The Welfare Effects of Opening to Foreign Direct Investment in Polluting Sectors

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  • Galinato, Gregmar I.
  • Graciano, Tim A.
  • Zhao, Xin

Abstract

This article shows how policies to attract foreign direct investment (FDI) in a polluting sector affect home-country welfare relative to the autarky case. We consider a welfare maximizing country who attracts FDI into a polluting sector, while accounting for environmental quality changes. The government sets the level of environmental regulation and public infrastructure. Foreign investors prefer good infrastructure quality and less environmental regulation. We show that under autarky, environmental regulations are increasing over infrastructure. However, with FDI, optimal environmental regulations may be a subsidy if the benefits from a wage increase outweigh the damages from pollution. Also, we find that if a country has very poor levels of infrastructure it is better off not allowing FDI to enter but as infrastructure quality increases, the result is reversed where welfare with FDI is higher than under autarky.

Suggested Citation

  • Galinato, Gregmar I. & Graciano, Tim A. & Zhao, Xin, 2015. "The Welfare Effects of Opening to Foreign Direct Investment in Polluting Sectors," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205092, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea15:205092
    DOI: 10.22004/ag.econ.205092
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    More about this item

    Keywords

    Environmental Economics and Policy; International Relations/Trade; Resource /Energy Economics and Policy;
    All these keywords.

    JEL classification:

    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth

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