Academic journal article Business and Economics Research Journal

Foreign Direct Investments and CO2 Emissions Relationship: The Case of Turkey

Academic journal article Business and Economics Research Journal

Foreign Direct Investments and CO2 Emissions Relationship: The Case of Turkey

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Foreign direct investment is important for both developed and developing countries. Especially after the 1980s, it has become important in developing countries. Recently, it seems that the investors take the environmental regulations of the country into consideration while making the choice of investment. As the level of development of the countries increases, the regulations related to the environment also increase as the increase in the income of consumers leads to more demand for environment friendly products and the increase of the pressure on the governance of the protection of the environment1. In addition to this, in developed countries, there is government intervention to technical, administrative, financial and legal arrangements to protect the environment, to prevent environmental pollution and to solve environmental problems in developed countries.

Government interventions related to environment may be both in the form of restrictions and incentives. Environmental taxes, environmental duties, funds, environmental labeling, permits, approvals and licenses and emissions taxes are restrictive instruments; while support for research and development investments, direct support for environment-friendly investments, financial subsidies and tax incentives are examples of environmental incentives (Karaca, 2012:183). Environmental regulations, such as taxation to avoid pollution, are factors that increase costs. Developing countries do not give much importance to environmental regulations due to reasons such as height of pollution absorption capacity, necessity of all kinds ofindustrial activity due to low income level, lack of development of environmental consciousness, the inadequacy of property rights (Gökalp and Yıldırım, 2004: 100). In addition to these, the fact that they do not make these arrangements in order to attract foreign direct investments to their countries may also be a result of low environmental standards. For these reasons, multinational companies operating in many countries are trying to provide cost advantage by preferring the countries where the legal regulations on the environment have not been determined yet. However, multinational corporations are ignoring the negative consequences of the investment they make about the environment.

This study tries to contribute to the literature by distinguishing pollution haven and pollution halo hypotheses from the theoretical literature on the relationship between FDI and CO2 and by testing the validity of these hypotheses using the Johansen Cointegration test and the vector error correction model for Turkey for the 1974-2013 period.

In this study, it is aimed to examine the relationship between foreign direct investment and carbon dioxide (CO2) emissions. The theoretical literature on the relationship between foreign direct investment and carbon dioxide emissions will be presented in the following section. Following the theoretical literature, the applied literature will be summarized. Literature review will be followed by methodology and data and in the final section the results will be discussed.

2. Theoretical Literature

In the literature, the relationship between foreign direct investment and environmental pollution for both developed and developing countriesis are explained by the approaches known as pollution haven hypothesis and pollution halo hypothesis.

2.1. Pollution Haven Hypothesis

Pollution haven hypothesis, predicts that as trade and investment obstacles between countries are abolished, the production of pollution-intensive goods by companies that are willing to escape from complying with costly legislation in their own countries will shift to countries with relatively poor environmental policies (Hoffman, 2005: 311; Kellenberg, 2009: 242; Dean et al., 2009: 1; Copeland, 2008: 64). This shift in production may emerge as a result of trade or liberalization of investments. …

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