The dynamics of foreign direct investments in land and pollution accumulation

Following the recent increase of foreign direct investments in land, this paper studies their possible effects on the development of a local economy. To this aim, we use a two-sector model (external and local) with heterogeneous agents: external investors and local land owners. We assume that both sectors are negatively affected by pollution, but only the external sector is polluting. The local government can tax the external sector’s production activities to finance environmental defensive expenditures. We first examine the equilibria that emerge in the model from the dynamics of pollution and physical capital, and then investigate the conditions for the coexistence of the two sectors and the impact of the external sector on the welfare of the local population. Using numerical simulations, we show that a welfare-improving growth path may occur only if the pollution tax is high enough and the impact of the external sector on pollution is low enough. Otherwise, a welfare-reducing growth path may occur, with foreign direct investments decreasing the revenues of local land owners.