The impact of FDI in the OECD manufacturing sector on CO2 emission: Evidence and policy issues

This work investigates the sign and the magnitude of the impact Foreign Direct Investment (FDI) inflowing in the manufacturing sector of the countries from the Organisation for Economic Co-operation and Development (OECD) exerts on the environment and, specifically, on the amount of CO2 from sectoral fuel combustion. By gathering data from various international institutions for those countries from 1989 to 2016, an equation model is built to take into separate account technique, scale and cumulative effects of FDI on CO2 and analysed through the panel data technique. The positive relationships found for all these effects would highlight a detrimental role of FDI on the environment. However, the very low magnitude of the estimated coefficients and the observation that the negative impact of FDI on CO2 decreases as the scale of its inflow increases, leads to a reconsideration of those arguments against the enforcement of international investment policies in the sector due to the environmental implications generally assumed. This positive environmental spillover is explained by referring to FDI as a driving force of technology innovation and, consequently, a way through which the implementation of more environmentally-friendly and cleaner production modes occurs. Results are consistent across different estimators and robust to a number of alternative specifications and additional co-variates. •The impact of FDI in the OECD manufacturing sector on CO2 from fuel burning is low.•As the scale of FDI increases the level of CO2 from fuel burning decreases.•As the economy in the manufacturing sector grows CO2 from fuel combustion decreases.•FDI is a transfer of technology innovation allowing cleaner production modes.