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Foreign direct investment, environmentally sound technology and informal sector

  • Chaudhuri, Sarbajit
  • Mukhopadhyay, Ujjaini

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 31447.

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Date of creation: 17 May 2011
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Handle: RePEc:pra:mprapa:31447
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  1. Eskeland, Gunnar S. & Harrison, Ann E., 1997. "Moving to greener pastures : multinationals and the pollution-haven hypothesis," Policy Research Working Paper Series 1744, The World Bank.
  2. Beladi, H. & Marjit, S., 1992. "Foreign Capital and Protectionism," RCER Working Papers 310, University of Rochester - Center for Economic Research (RCER).
  3. Luken, Ralph & Van Rompaey, Frank & Zigová, Katari­na, 2008. "The determinants of EST adoption by manufacturing plants in developing countries," Ecological Economics, Elsevier, vol. 66(1), pages 141-152, May.
  4. Beckerman, Wilfred, 1992. "Economic growth and the environment: Whose growth? whose environment?," World Development, Elsevier, vol. 20(4), pages 481-496, April.
  5. Chaudhuri, Sarbajit & Mukhopadhyay, Ujjaini, 2006. "Pollution and Informal Sector: A Theoretical Analysis," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 363-378.
  6. Chandra, Vandana & Khan, M Ali, 1993. "Foreign Investment in the Presence of an Informal Sector," Economica, London School of Economics and Political Science, vol. 60(237), pages 79-103, February.
  7. Sarbajit Chaudhuri, 2001. "Foreign Capital Inflow, Non-traded Intermediary, Urban Unemployment, and Welfare in a Small Open Economy: A Theoretical Analysis," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(3), pages 225-235.
  8. Sarbajit Chaudhuri, 2001. "Foreign Capital Inflow, Technology Transfer, and National Income," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(1), pages 49-56.
  9. Gene M. Grossman & Alan B. Krueger, 1994. "Economic Growth and the Environment," NBER Working Papers 4634, National Bureau of Economic Research, Inc.
  10. Grinols, Earl L, 1991. "Unemployment and Foreign Capital: The Relative Opportunity Costs of Domestic Labour and Welfare," Economica, London School of Economics and Political Science, vol. 58(229), pages 107-21, February.
  11. He, Jie, 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, Elsevier, vol. 60(1), pages 228-245, November.
  12. Khan, M. Ali, 1982. "Tariffs, foreign capital and immiserizing growth with urban unemployment and specific factors of production," Journal of Development Economics, Elsevier, vol. 10(2), pages 245-256, April.
  13. Cristina Tébar Less & Steven McMillan, 2005. "Achieving the Successful Transfer of Environmentally Sound Technologies: Trade-related Aspects," OECD Trade and Environment Working Papers 2005/2, OECD Publishing.
  14. Selim Cagatay & Hakan Mihci, 2006. "Degree of environmental stringency and the impact on trade patterns," Journal of Economic Studies, Emerald Group Publishing, vol. 33(1), pages 30-51, January.
  15. Erik Dietzenbacher & Kakali Mukhopadhyay, 2007. "An Empirical Examination of the Pollution Haven Hypothesis for India: Towards a Green Leontief Paradox?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 36(4), pages 427-449, April.
  16. Chaudhuri, Sarbajit & Mukhopadhyay, Ujjaini, 2009. "Revisiting the Informal Sector: A General Equilibrium Approach," MPRA Paper 52135, University Library of Munich, Germany.
  17. Gupta, Manash Ranjan, 1997. "Foreign Capital and the Informal Sector: Comments," Economica, London School of Economics and Political Science, vol. 64(254), pages 353-63, May.
  18. Brecher, Richard A. & Diaz Alejandro, Carlos F., 1977. "Tariffs, foreign capital and immiserizing growth," Journal of International Economics, Elsevier, vol. 7(4), pages 317-322, November.
  19. Barrett, Scott & Graddy, Kathryn, 2000. "Freedom, growth, and the environment," Environment and Development Economics, Cambridge University Press, vol. 5(04), pages 433-456, October.
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