Foreign Direct Investment and the Pollution Haven Hypothesis: Evidences from Bangladesh

Abstract

This study investigates the potential existence of the Pollution Haven Hypothesis (PHH) in Bangladesh. The objective is to examine the impact of lax environmental policies on foreign direct investment (FDI) inflows and evaluate the subsequent effects of these inflows on pollution levels within the country. Employing both quantitative and qualitative approaches, the analysis incorporates the Johansen cointegration test, Vector Error (VECM), and Granger causality test, complemented by Key Informant Interviews (KII) with 12 experts. The Johansen cointegration test identifies a long-run relationship between CO2 emissions and FDI inflows, though this connection lacks statistical robustness. The VECM results suggest that FDI inflows are shaped by a combination of economic and environmental factors, with inflation emerging as a significant deterrent. The Granger causality test reveals no significant causal relationships between FDI and CO2 emissions, inflation, or trade openness, although FDI significantly impacts GDP per capita and electric power consumption. The qualitative findings emphasize low labour costs, market size, and geopolitical considerations as key determinants of FDI, while concerns are raised about the environmental risks posed by FDI in polluting industries. Overall, the study has found limited evidence in support of the pollution haven hypothesis (PHH) in Bangladesh, concluding that weak environmental regulations are not the primary factor attracting FDI in Bangladesh. The study advocates for strengthened environmental enforcement, the diversification of FDI into less polluting sectors, and the promotion of cleaner technologies to achieve sustainable industrial growth without compromising environmental integrity.