Pollution Haven or Pollution Halo? Green Investment and Environmental Outcomes in Asia

Abstract

This study examines the dynamic association between greenfield investment projects and the quality of institutions to environmental performance in 40 countries of Asia on the years 2000-2024. While the presence of foreign direct investment has often been linked to increased environmental degradation under the pollution haven hypothesis, new thinking places the focus on the role of foreign direct investment in promoting greater sustainability by transferring new, cleaner technologies and best practices in accordance with the pollution halo hypothesis. Using a model of an autoregressive distributed lag panel framework supplemented with causality analysis, this study attempts to analyze the interaction of new foreign capital inflows and governance structures with human capital and economic growth in influencing outcomes on the environment (as measured in the Environmental Performance Index). The results show that greenfield investment has a positive link to the environmental performance, but the impact is only statistically significant if mediated by good institutional quality, underlining the importance of governance to the shaping of sustainable performance. Economic growth has an Environmental Kuznets Curve where there is a rise in environmental stress at lower levels of income but an improvement as the economy develops. Human capital has a positive contribution to environmental quality, which reflects the importance of education and social development to strengthening sustainability. Estimates for the short run are more volatile and have no important meaning, other than greenfield investment. Some results of causality tests show two-way relationships between governance, investment, and environmental performance. Overall, the findings indicate how greenfield investment has the potential to become an engine for environmental improvement in Asia if backed by good governance, transparent policies, and human capital investment. The paper has important policy implications on how foreign investment policies can be operationalized in a manner that is consistent with the longer-term sustainability aspirations of the region.