Environmental Impact of Foreign Direct Investment in Bangladesh

Abstract

Rapid economic growth is the prime objective of many developing countries as economic growth results in poverty alleviation and welfare enhancement of the people. However, most of the developing countries lack sufficient amount of capital to invest for attaining economic growth. In this context, foreign direct investment (FD/) is recognized as a key component of investment in those developing countries. However, inflow of FD/ can have adverse impacts on the environment of the host countries as foreign investors sometimes move their operations to developing countries in order to take the advantage of less stringent environmental regulations in those countries. There are several studies on the environmental impacts of foreign direct investment focusing on Pollution Heaven hypothesis in the context of different countries. However, scant attention has been given on the FDI-environment relationship in the context of Bangladesh. Thus, the main objective of this study is to investigate the empirical relationship between foreign direct investment (FD/) and environmental degradation as it applies to selected air, water and toxic pollutants in Bangladesh. Emphasis has been given on the linkages between FD/, composition of production, composition of export and environmental quality in Bangladesh. Thereby, this research addresses the issues, methods and policy implications concerning the linkages between foreign direct investment and environmental degradation first in a way of literature study and then focusing on a modeling analysis on the linkages between FD/ and its relevant environmental impact in Bangladesh. This study also investigates whether there has been a greater inflow of FD/ into pollution-intensive sectors in the post-trade liberalization period. Ordinary Least Squares (OLS) and fixed effect estimation techniques were used to examine the environmental impact of FD! in Bangladesh, where three functions viz. production composition function, export composition function and FD! inflow function is constructed following the Cobb-Douglas production function approach. This study used panel data set of 3-digit BSIC level manufacturing industries and applied /PPS coefficients invented by the World Bank in generating the industrial pollution data for Bangladesh. The empirical results suggest that there has been a change in the composition of production in Bangladesh that parallels the gradual opening up of the economy and inflow of FDJ It is found that over the sample period manufacturing production gradually became pollution intensive in terms of toxic pollutants. Manufacturing production in Bangladesh was found mildly associated with air pollutants, and was not associated with water pollutants. It is found that pollution intensity in exports of Bangladesh have reduced over the sample period while only S02 intensity has increased during the observed period. Finally, we found consistently robust results which indicate that foreign direct investments have been inflowing into higher air pollution intensive and toxic pollution intensive manufacturing sectors. A disaggregated analysis showed that manufacturing production has become more pollution intensive during the post trade liberalization period. Thus, it can be concluded that while the production composition function and FD! inflow function supported the pollution heaven hypothesis mildly, the export composition function did not support that hypothesis in case of Bangladesh at least in the observed period.