Does foreign direct investment promote environmental efficiency in developing economies? Evidence from Economic Community of West African States

Abstract

Foreign direct investment (FDI) continues to play a vital role in developing economies following its ability to fill a number of gaps, chief among which is technology gap. However, the contribution of such FDI inflow to environmental quality, hence sustainable development, has been questioned severally in the literature. This study investigates the role of inward FDI in environmental efficiency among the Economic Community of West African States (ECOWAS) countries during 1980-2016. It utilizes the pollution haven (halo) hypothesis and estimated the specified model using the autoregressive distributed lag techniques for the individual countries, and random and fixed effect, as well as seemingly unrelated regression methods for the panel analysis. Findings show evidence that FDI inflow hampers environmental efficiency in all ECOWAS countries, except Sierra Leone where increased inflow of FDI promotes environmental efficiency only in the short run. Results also show that energy intensity has significant negative effect on environmental efficiency in Benin (short run), Burkina Faso, The Gambia, Mali (short run), Togo and panel of countries, suggesting that energy-efficient technology enhances this efficiency. ECOWAS policy formulation must therefore harness the potential benefits that inward FDI brings to the community by harmonizing environmental regulations among its members in order to make the region safe and environmentally attractive to clean foreign investment. Other policy implications are derived for sustainable development of the community.

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