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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.

Suggested Citation

  • Chaudhuri, Sarbajit & Mukhopadhyay, Ujjaini, 2011. "Foreign direct investment, environmentally sound technology and informal sector," MPRA Paper 31447, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:31447

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    References listed on IDEAS

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    Cited by:

    1. repec:spr:nathaz:v:91:y:2018:i:2:d:10.1007_s11069-017-3148-0 is not listed on IDEAS
    2. Mandal, Biswajit, 2014. "Trade Reform, Environment and Intermediation: Implication for Health Standard," MPRA Paper 56524, University Library of Munich, Germany.

    More about this item


    Pollution; foreign capital; environmentally sound technology; informal sector; formal sector; Environmental Kuznets Curve; general equilibrium;

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • 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
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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