How Does Foreign Direct Investment into Resource Extracting Industries Affect the
Environmental Welfare of the Developing World?
Abstract: How does FDI in resource extraction industries (REIs) affect environmental welfare in
developing countries? Anecdotal evidence from South America, the Middle East and subSaharan Africa links resource dependence with widespread environmental degradation. Given
that many developing countries are resource rich and, therefore, desirable destinations for FDI, it
is imperative to understand if these highly publicized negative outcomes are anomalous, or rather
examples of a global systematic pattern. This research complements the vast literature exploring
how FDI affects the developing world by investigating the relatively understudied relationship of
FDI in REIs and environmental sustainability. I conceptualize environmental welfare as the
intrinsic link between human welfare and environmental sustainability, and argue that the
environmental (and human) wellbeing of resource dependent countries may be negatively
affected by FDI in REIs. I test my argument quantitatively in a sample of 30 developing
countries over 33 years. I find that environmental degradation is strongly correlated with FDI in
REIs. These conclusions are relevant to the current global context, where the global political
economy benefits from partnerships between private actors and public entities, to ensure global,
environmental, and economic stability. This research is also relevant to American public policy
in terms of its foreign aid commitment towards global human development
1
Introduction
“It kills our fish, destroys our skin, spoils our streams, we cannot drink… I have no
livelihood left” (Duffield 2010). This quote from Nigerian resident, Saturday Pirri, references the
perpetual negative effect of foreign oil industries operating in his in his country. The UNDP
reports that more than sixty percent of Nigerian citizens’ principle source of food stems from
their natural environment (“Petroleum, Pollution and Poverty in the Niger Delta” 2001).
However, the strong presence of resource extracting industries (REI’s) operating within the
country has greatly weakened the status of this quintessential element of the human condition in
Nigeria. Additionally, the U.N has concluded that it will take at least thirty years for Nigeria’s
environment to fully recover from the estimated 7,000 oil spills which have taken place since
2000 (Duffield 2010). Moreover, minimal effort has been made by Nigerian government to
better regulate the workings of foreign firms due to its economic dependence on extractive
foreign direct investment (Portnoy 2012; BBC news 2012; Watts 2008).
Though FDI is frequently regarded by academics and policy makers as integral step on
the road to development in the third world, the effects of natural resource extraction by foreign
entities within developing nations are often severely detrimental to the environment (Gray 2002;
Moran 2011). Given that many developing countries are resource rich and, therefore, a desirable
destination for FDI; it is imperative to understand if the highly publicized negative consequences
such as those experienced in Nigeria are anomalous, or examples of a global systematic pattern.
It is the intent of this paper to investigate how FDI into REIs affects the environmental aspect of
human welfare within developing countries.
2
The relationship of FDI into REIs and developing countries speaks volumes to the global
political economy’s influence on human rights. Resource extraction is indeed one of the most
profitable industries in the world. Natural resources are responsible for one fifth of global trade.
Alone, the oil and gas market make up for 15% of the world economy (Moran 2010). In 2012,
over 50% of total GDP in nine developing countries was dependent on natural resource
exportation (Ruta and Venables 2012). However, UNCTAD notes, “most mineral- and oilabundant economies have performed worse in terms of (human development) and poverty
reduction than resource-poor ones” (2007). The disconcerting reality that two-thirds of the
world’s poor reside in resource-rich states suggests that their wellbeing may be greatly affected
by the presence of extractive multinational corporations (MNCs) operating within their region
(Transparency International and Revenue Watch 2012).
This topic also holds relevancy to American policy. The federal government is the
world’s top donor in foreign aid- spending roughly 50 billion dollars each year (“U.S. Foreign
Aid By Country” 2012). The U.S Agency for International Development (USAID), cites two of
its purposes as the improvement of global health and environmental sustainability (2014).
Additionally, President Barack Obama claims that his Presidential Policy Directive on Global
Development recognizes foreign aid as “vital to U.S. national security and is a strategic,
economic, and moral imperative for the United States.” According to this policy directive,
America should utilize its foreign assistance to improve global human development through the
integrating markets of poor countries into the global economy (Whitehouse.gov 2010). However,
this paper will argue that Economic liberalization can foster the spread of FDI into REI’s in
developing countries with little to non-existent environmental protective regulations. Thus,
spending foreign aid to accomplish both of the ambitious goals of human development through
3
liberalizing trade while maintaining global environmental sustainability may be
counterproductive and increasingly expensive.
The research presented in this paper complements existing literature on the topic of FDI
and developing countries by focusing on the human consequences of environmental degradation
brought on by high volumes of the former concept into the extractive sector of host countries. I
explain the intrinsic link between human welfare and environmental sustainability by
conceptualizing “environmental welfare” in the context of the individual level, and argue that
this component of wellbeing will be negatively affected by strong levels of FDI into REIs. The
hypothesis is quantitatively tested by a sample 30 countries over 33 years. Additionally, I
hypothesize that institutional type determines the extent of environmental degradation. The
findings provide evidence that FDI into REI intensity is directly correlated with the
environmental degradation of several components of environmental and human health.
Astonishingly, my findings also show the democracies perform worse in terms of environmental
welfare comparative to autocracies. The conclusions are relevant to the current global context,
where the global political economy benefits from partnerships between private actors and public
entities, to ensure global, environmental, and economic stability. My findings are also relevant to
American policy as it pertains to its commitment to global human development.
This paper is organized as follows. Existing relevant literature is discussed in the next
section. Following the literature review is a conceptualization of the research question’s
variables, the argument and hypotheses, and an explanation of the research design. Lastly, the
conclusion includes policy recommendations.
Literature Review
4
The effect of FDI on the environment of developing countries is a subject entrenched in
debate. The relevant literature on this topic is often associated with the concept of the “pollution
havens hypothesis” (PHH)- the notion that pollution intensive firms actively seek to invest in a
country with lax environmental standards compared to that of the home country in order to avoid
abatement costs and maximize profitability (Neumayer 2001; Spatareanu 2007). Zeng and Eastin
question the validity of such a concept by stressing the “self-regulating” nature of MNCs (2007).
Through an empirical analysis of FDI flows in China, these authors argue that MNCs are
deterred from engaging in pollution intensive operations by fear of future regulation. They claim
that FDI can be positively correlated with environmental protection because increased
environmental degradation by MNCs will inevitably lead to home country implementation of
stringent environmental regulation which, in turn, damages profitability. Additionally, the
authors maintain that FDI facilitates “cleaner” technology spillover to developing countries
which otherwise could not afford it. Thus, the self-regulating nature of MNCs does not account
for pollution havens, and can result in a positive impact on the environment of a host country
(Zeng and Eastin 2007).
In stark contrast to the above mentioned literature, Spatareanu (2007), and Cole et al.
2006) use empirical analysis to uphold the validity of the PHH. Spartareanu refers to a “PushPull” effect which dictates the likelihood of pollution intensive industries to invest abroad. The
“push effect” is the pollution intensive industry’s reaction to the home country’s environmental
policy of abatement costs (pollution tax, fines, and protective technology requirements, etc.).
Such regulation deters pollution intensive industries from continuing investment into their home
country. The “pull effect” occurs when a potential host country is identified as desirable target
for investment because their existing environmental policies are of greater laxity compared to
5
that of the home country. Spatareanu’s empirical research provides evidence that the laxity of
environmental regulation not only determines the likelihood of foreign investment but also the
volume (Spatareanu 2007).
Cole et al. (2006) elucidate that the existence of pollution havens is dependent on the
corruptibility of host countries. These authors maintain that MNCs are more likely to invest in
countries with lax environmental standards, and engage in lobbying (although they clarify that
“bribery” is a more appropriate description) to sustain or increase the laxity of host country
environmental regulation. Their empirical evidence finds that the higher degree of corruptibility,
the more likely a host country will be influenced by the “bribery effect” which facilitates
unchecked MNC operations that lead to greater environmental degradation. Inversely, their
findings show that countries with low corruptibility are correlated with a negative effect on
environmental degradation (Cole, Elliott, and Fredriksson 2006).
The aforementioned articles illustrate some of the main points of debate concerning the
relationship described in this paper. Zeng and Eastin (2007) demonstrate how FDI can benefit
the environment by focusing on the “cleaner” technology spillover characteristic of FDI, but
their observation is limited to China which is not representative of FDI impact in the global
realm (2007). Spatareanu’s analysis of the “push-pull” effect describes why MNCs are likely to
invest abroad given their desire to avoid higher abatement costs, but the research is a narrow
focus on investment into European countries over three years (2007). The Cole et al. article
empirically analyzes how MNC influence on developing countries can result in stagnating effects
on their environmental policy, but does not observe the direct environmental health
consequences of FDI into REIs.
6
This paper adds to existing empirical work related to the impact of FDI on the developing
world by including, unlike earlier studies, a narrowed focus of FDI into the extractive sector and
its effect on the human welfare aspect of the environment. Given that FDI has been associated
with both positive and negative effects on the developing host country (Gray 2002; Moran 2010),
an observation solely inclusive of FDI targeted into the REIs is necessary to determine how
industry type FDI matters. Moreover, environmental degradation can take the form of numerous
manifestations- be it consequences for wildlife, ecosystem health, land conservation, etc.
(Picolotti and Taillant 2003). As such, the research presented in this paper is inclusive of several
components of environmental health, and should be viewed in terms of their importance to
sustaining human wellbeing in order to account for the intrinsic link between human and
environmental wellbeing.
Defining Environmental Welfare
Adopting an official definition which establishes a direct link between human welfare
and environmental health is a challenge the international community has yet to overcome. The
1994 edition of UN’s Human development Report identifies “environmental security” as an
important conduit for sustaining and improving the human condition in regions of poor quality of
life, but does not provide a detailed explanation for the concept (UNDP 1994). The result of this
ambiguity came in form of an array of attempts from academics producing various, indistinct,
and sometimes competing definitions of environmental security (Glenn et al. 2009).
Additionally, neither the U.N or the World Health Organization have yet to officially adopt a
definition of environmental security (Glenn et al. 2009).
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The necessity for a definition which identifies the intrinsic link between human welfare
and environmental health is evident by the focus gap among human rights and environmentalist
groups. While human rights groups tend to place their primary focus on the political and civil
injustices, environmentalist factions focus their attention on natural resource and land
preservation without incorporating the human wellbeing impacts of environmental deprivation.
As a result, populations which suffer consequences to their livelihood or wellbeing from
environmental abuse (such as those experienced in Nigeria) are overlooked by the framers of
international laws and policies (Picolotti and Taillant 2003).
The concept of “environmental welfare” derives from three previously produced
definitions- , “human welfare”, “human security”, and “environmental sustainability”. The
UNRISD describes the first of these as the provisions of sustainable and improved conditions of
living. This definition includes, but is not limited to, the natural environment as it is a channel for
local populations to acquire necessary resources such as food and clean water (Blaikie and
Jeanrenaud 1996).
Similar to the definition produced by the previously mentioned, Mathew (2010) cites
human security as particularly sensitive to environmental change as the expansion of
environmental degradation is responsible for interrupting human development. He defines
human security as the “freedom from risk of loss or damage of (any element) that is important
for survival and well-being” (Mathew 2010). In terms of this paper’s research question, human
security is relevant to environmental health as it describes the individual right of one’s access to
environmentally produced resources without being disturbed or interrupted by foreign influence.
8
Environmental sustainability is the most ambiguous of the three concepts. The UN has
declared that human progress efforts should be viewed in conjunction with the three-pronged
notion of “sustainable development” - social, economic, and environmental (UNDP 2006).
Similar to “environmental security” however, this concept has yet to be clearly defined, and is
rarely described in disassociation from the other components (Morelli 2011). One notable flaw
with the holistic approach to defining human development is that such absence of any scientific
explanation of the individual concepts impedes the ability of policy framers to be guided by a
meaning that focuses on the root causes of relatable issues (Goodland 1995). Thus, advocates for
a more focused viewpoint of environmental sustainability often refer the concept as “the
maintenance of natural capitol (clean water, air quality, and ecosystem health)” or “the
preservation of environmental assets” for the betterment of future generations (Goodland 1995;
Morelli 2011).
To avoid adding to the collection of attempts to (re-)define environmental security, and to
propose a concept which refers particularly to the human wellbeing aspect of the environment, I
propose a two-fold definition of “environmental welfare.” First, environmental welfare refers to
the capacity of the environment to produce ecosystem services (clean water and air, fertile and
sustainable land, and biodiversity health) that are necessary for human wellbeing. The second
part of this conceptualization refers to the individual ability to sustain one’s livelihood through
their access to the environment. The concept of environmental welfare is an appropriate
description of one’s dependency on the health of their surrounding natural environment as well
as their access to obtain the ecosystem services it produces. Within this framework,
environmental welfare serves as the mid-point between human welfare and environmental
9
sustainability as it focuses on the present state of the human condition as intrinsically linked to
the current state of environmental quality.
This conceptualization relates back to the previously illuminated human and
environmental concepts in various ways. It distinguishes the environment as a key provision for
the human condition. In terms of security, a person’s environmental welfare can be disrupted by
non-natural influences such as the explanatory variable recognized in my research question. My
definition is relevant to sustainability as the current state of the environmental welfare will
dictate whether future generations will possess the ability to sustain their wellbeing through
access to environmental products.
FDI into REIs
Relative to its dependent counterpart, FDI into REIs variable is easier to quantify. The
World Bank has classified FDI as “investment to acquire lasting management in an enterprise
operating in an economy other than that of the investor”(World Bank n.d.). FDI has been cited as
beneficial for poor and emerging economies as it often results in the necessary increased capitol,
technology spillover, and managerial know-how to sustain a functional economy (Gray 2002;
OECD 2002). This concept acts as the explanatory variable, but is solely inclusive of investment
into resource extraction industries.
Resource Extraction: Polluting by Nature
This paper maintains that FDI focused in REIs in developing countries results in a
negative impact on environmental welfare. One of the main reasons for this outcome is due to
the intensive polluting elements of extractive operations. In terms of oil, the extensive drilling
involved with the exploration and extraction of fossil fuel reduces vegetative land, marine and
10
animal life, and creates water contamination. The effects of which are exacerbated should spills
occur (TEEIC n.d.). The negative outcomes of fossil fuel extraction suffered in Ecuador provides
an exemplar to how this type of damage to the environment directly affects citizen wellbeing. In
addition to the virtual, complete deforestation of its Sierra highlands, oil extraction by foreign
industries is responsible for increased risk of “cancer, abortion, dermatitis, fungal infection,
headaches, and nausea” and other chronic illness brought on by water contamination (Dabbs
1996). The repercussions of the widespread water contamination from operations of TEXACO
oil go beyond damage to drinking water says local farmer, Servio Curipoma, who unknowingly
irrigated his crops with the polluted liquid. The result of which was the complete destruction of
the crops his family depended on for income. Additionally, though this position is not supported
by his government, Mr. Curipoma holds the oil industry responsible for the death of both of his
parents who went to an early grave because of lung cancer. “We didn't know what consequences
it would have on our health” (Caseilli 2011).
The consequences resulting from mining operations are of equal detriment towards to
wellbeing of local populations in poor countries. The constant environmental degradation of the
South Goa region of India serves as a prime example of how resource dependency reduces not
only quality of life, but also the desire government and worker to protect citizen health. In this
country, the extraction of iron ore has resulted in the accumulation of iron rich clouds which
poison the air quality of neighboring communities. The polluting dust from the emissions settle
on nearby crops, homes, and even schoolhouses. The effect of which is increased risk of chronic
lung diseases including silicosis and lung cancer. However, the Indian citizenry is divided on this
issue. Those who are employed by the mining industry are willing to trade stable income at the
expense of their health. Alexi Sequeria, former Goa environment minister, describes the situation
11
as, “the local in many areas believes that money is God. You and I may believe he is sacrificing
his health but he does not care… they will not allow (the government) to act” (Albin-Lackey and
Human Rights Watch 2012).
Other human welfare abuses brought on by environmental damage from mining are felt
in the Democratic Republic of the Congo (DRC) and Chile. In the DRC, local populations have
been denied access to clean drinking water due to increased land degradation which obstructs
routes to local wells and rivers from which nearby communities depend on to acquire their
drinking water (Amnesty International 2013). In Chile, mining companies have destroyed
numerous water sources by their exploration methods which communities rely on to sustain their
health. This extremely detrimental approach is supported by the water code set by the Chilean
government. The effected population claims this outcome is representative of the mining
industry’s total disregard for citizen access to water. In a letter to the Chilean president,
protestors proclaimed, "We have discovered that there is water in Chile, but that the wall that
separates it from us is called ‘profit’” (Jarroud 2013).
The existing anecdotal evidence suggests that the FDI into REIs detrimentally effects the
environmental welfare of host countries. However, in the following sections I will discuss why
the governments of many host countries are unable or unwilling to implement more stringent
regulations on MNCs.
Profitability and Exploitation
The importance of natural resources to the global political economy suggests the ability
of developing countries to utilize its resource wealth as a bargaining chip when negotiating with
potential investors (Smarzynska and Wei 2001). However, empirical research from Ramamurti
12
and Downey et al. demonstrate that the bargaining power of developing countries has diminished
over the past forty years due to the ratification of coercive economic liberalization treaties
coupled with the crushing debt to the IMF acquired during economic crises of the 1980’s and
90’s (2010; 2001). Furthermore, Ramamurti points to the increased influence of MNCs on their
home country’s government. Therefore, any potential intent of a home country to apply
international regulations on the operations of MNCs may be rendered futile (2001). This
empirical evidence demonstrates the dependence of developing country on FDI as it pertains to
the necessity of increase revenue to reduce devastating debts and adhere to international treaties.
Adding to the above paragraph, it is also important to note the role of international
monetary organizations play in determining the freedom of MNCs to pollute developing
countries. Downey et al. (2010) argues that the IMF and World Bank are exploitive entities. The
authors point to the importance of raw materials to the economic sustainability of rich nations
who are the main decision makers of the said international organizations. The authors claim the
structural adjustment programs imposed on developing countries force them to maintain frequent
raw material exportation. The authors add that developing countries are often coerced into
agreeing to punitive consequences which include paying large insurance claims should the
exportation be disrupted in anyway. “As a result, developing nation governments may feel that
regardless of their own motives and interests, they have to use all means necessary to protect
resource extraction activities so as to meet their debt obligations, ensure continued foreign
investment, and minimize conflict with more powerful nations and institutions” (Downey,
Bonds, and Clark 2010).
The PHH is another mechanism relevant to the relationship of FDI into REIs and
environmental welfare. Considering that MNCs are agents of profitability, it is logically
13
consistent to conclude that they pursue strategies which facilitate the avoidance of extra
abatement costs. Within the context of the OLI framework1, a pollution haven provides an ideal
location to maximize profitability by cutting the regulatory corners which require MNCs to pay
fines or taxes for excessive pollutant bi-products of their operations, or provide costly protective
technology which reduce the possibility for accidents. Therefore, the potential to maximize
lucrativeness incentivizes MNCs to relentlessly target developing countries as destinations for
investment, and lobby against governmental regulations which may hinder potential profits.
H1: Developing countries possessing high levels of FDI into REIs will be poor in
environmental welfare.
Institutional determinates
It is important to note that negative impacts on environmental welfare by FDI have not
been felt equally everywhere. A report from the WTO states, “The negative outcomes (of
resource extraction) in Equatorial Guinea, Democratic Republic of the Congo, Angola, and
Nigeria are countered by positive development impacts in Brazil, Columbia, Argentina,
Indonesia, Malaysia, and Botswana” (Moran 2010). Relevant arguments have cited the
bargaining ability and corruption level of developing countries as determinates of negative
(positive) impacts.
Borrowing from Cole et al., I stress the prominence of corruption as a determinate of
negative environmental consequences from FDI into REIs. A chief characteristic of corruption is
1
OLI framework refers to the economic theory that foreign investor observe “Ownership advantages, Location
Advantages, and Internalization advantages” prior to investing in a potential host country.
14
bribery (Transparency International and Revenue Watch 2012). If MNCs are permitted to engage
in such a corruptive activity in developing countries, then state and local political leaders will be
deterred from implementing policy which protects the environmental welfare of the governed.
Conversely, countries with low corruptibility will be more concerned with improving the
conditions of their citizens. This framework suggests that countries with strong democratic
institutions will be less likely to conform to MNC corruptible influence as they are more
responsive to citizen demands then that of their non-democratic counterparts. Democratic-state
leaders are more responsive to the strains of the citizenry because their political future is
dependent on their ability to govern a wide base. Conversely, Autocratic leaders must only
appeal to a minimal amount of constituents; and thus, are more likely to be free from criticism
when accepting corruptible gifts.
H2: Countries with strong democratic institutions perform better in terms environmental
welfare than non-democratic ones.
Research Design
The basic question I intend to answer is what is the effect of FDI into REIs have on the
environmental welfare of host developing countries. I test this question through a panel analysis
of 30 developing countries over the period of 1980-2012. Because this question centered on the
link between human and environmental health, the research design measures both environmental
and human health qualities of each country to describe the dependent variable.
The independent variable is measured by FDI inflows into oil and mineral extractive
industries as a percent of GDP. The data were collected from UNCTAD’s World Investment
Directory. Due to the scarcity of available data on FDI, I also use oil and mineral rents as a
15
percentage of GDP as an alternative measurement. The data extracted from the World Banks,
“World development indicators” database (World Bank 2005) have a greater temporal and
geographic coverage. Admittedly, this alternative indicator used to observe FDI into REIs
functions as a proxy, rather than a direct measure of the independent variable. However,
UNCTAD notes that developing countries are virtually incapable of possessing necessary
technological equipment to perform efficient resource extraction devoid of foreign assistance
(Kraemer and Tulder 2009). It is then appropriate to assume that high levels of exports from the
extractive industries of developing countries indicate the presence of foreign capital in these
industries. The same type of measurement has been used to be Fearon and Laitin (2003) to
demonstrate the resource dependence of developing countries.
The aggregate data featured in my design is meant to be descriptive of environmental
welfare, and is comprised of data from the “Human Development Indicators” database and the
UNDP’s “Human Development Index”. Since environmental welfare is a multi-faceted concept,
measurements of the environment derive from World Bank data of “terrestrial protected land”,
“Improved water source,” “CO2 intensity” and “arable land.” The data regarding human welfare
stems from the UNDP’s “human development index (HDI) value.” Terrestrial protected land
refers to government protection of “nature reserves or wildlife sanctuaries, protected landscapes,
and areas managed mainly for sustainable use”; improved water source indicator incorporates
country percent of population that has access to protected water sources (such as springs and
wells) as well as piped water sources; CO2 intensity describes total emissions of the chemical;
arable land refers to percent of total land “under market or kitchen gardens”(World Bank n.d.).
HDI value is an index scoring of country achievement in basic elements of development
including “a long and healthy life, knowledge and a decent standard of living” (UNDP 2012).
16
These data were chosen because each measurement is relevant to capturing a facet of
environmental welfare: human health (HDI value), air and water quality (improved water source
and CO2 emissions), and land conservation (protected and arable land).
I test the second hypothesis by observing how the independent variable affects the
aspects of the environment in democratic states compared to autocratic ones. This is measured
through data from the Polity IV Project’s coding of state democracy level. Assuming that
democratic states are less corruptible than autocratic ones, these data are necessary to observe
what role institutional type plays in determining the extent of potential impacts of FDI into REIs
on environmental welfare.
Findings
The validity of my main hypothesis was upheld by the findings of the research design.
The featured test provides empirical evidence that environmental degradation and poor quality of
health is correlated with high inflows of FDI into REIs. While the explanatory variable had
adverse effects on all environmental welfare components (see figures 1-10 odd numbers),
“protected land”, “arable land”, and “CO2 intensity” (Figure 1.) appear to be particularly
sensitive to FDI into REIs volume. This is most likely due to the explorative operations utilized
by extracting industries which were discussed previously. The indirect observation of the
explanatory variable produced greater disconcerting results as the negative impacts were
exacerbated in almost every category excluding improved water source.
Surprisingly, my empirical test did not support the second hypothesis. Excluding
improved water source, figures 11-14 show autocracies to perform exponentially better in terms
of environmental welfare than their democratic counterparts. Figure 14 presents the most
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alarming reality as autocracies display a significant increase in HDI value when they possess
strong FDI into REIs dependence while Democracies show a sharp decrease. These findings are
alarming given existing notions which support democratization.
The increased negative effect of FDI into REI’s and environmental welfare on
democracies is most likely due to the often direct correlation between democratization and
economic liberalization. In his book, Government and Politics in Africa, William Tordoff (2002)
observes the history of development of the continent. He states that in order to receive the
necessary development loans from international monetary organizations, African states were
forced to demonstrate their commitment to democracy by completely liberalizing their trade with
the international community. They were forced to abandon almost all parastatal enterprises
because it was thought that African governments were too corrupt to control the economic
atmosphere. As such, African states were flooded with foreign private industrial investments into
their markets (Tordoff 2002). It is reasonable to assume that the type of conditional loans given
to democratizing African states which foster FDI is part of a global effort by international
monetary organizations.
Problem for Future Research
The findings of my research analysis provide evidence of how developing countries can
be adversely affected by FDI into REIs. However, the amount available data regarding the
described relationship is disturbingly scarce. The void in data has been credited by previous
authors as a major obstacle which impedes research (Cole, Elliott, and Fredriksson 2006;
Neumayer 2001; Spatareanu 2007; Xing and Kolstad 2002) One focus of the international
community should be the proliferation of statistics relevant to the overall status of countries’
18
environment. Future research will depend on more available data in order to understand total
impacts and root problems of environmental welfare issues.
Policy Recommendations
The findings of my research demonstrate how a specific type of FDI can negatively affect
human development. This is contrary to a popular notion which points to FDI as the savior of the
developing world. Key policy makers must broaden the focus of human development efforts to
improve the economic circumstances of developing countries in addition to improving economic
stability. While liberalizing trade and appealing to foreign investors can indeed bring beneficial,
economic outcomes, the cost of doing so must be weighed in contrast to the environmental
welfare of host country citizens. Relevant policy framers should focus efforts on promoting
governmental regulations in developing countries which protect the environment. This
recommendation falls in line with a statement made by President Obama who in his first address
to the UN declared, “those wealthy nations that did so much damage to the environment in the
20th century must accept our obligation to lead” Whitehouse.gov 2009).
Conclusion
The purpose of this research design was to observe how FDI into REIs affects the
environmental welfare of developing countries. I argue that MNCs will hold very little to no
regard for the environment of host countries should it present an obstacle in the way profits, and
democratic states are more likely to protect the environmental welfare of its citizens. Through an
observation of 30 countries over 33 years, I find evidence in support of the former argument, but
the latter was not proven correct. In relation to the main research question, these findings imply
19
that increased foreign investment may result in lower governmental regard to retain a sustainable
environment.
These findings are relevant in the global economic context in that they demonstrate the
relationship between the two variables benefits the investor over the host country. Given the
lucrative nature of the resource market, MNCs are not likely to reduce investment into resource
rich developing countries in the near future. My findings suggest that increased foreign
investment into the extractive sector would exacerbate damage to the integral traits of the
environment which are necessary to maintain human wellbeing. These conclusions are also
relevant to current American Policy, in which foreign aid is meant to accomplish clear objectives
such as improving human development and environmental sustainability while also liberalizing
trade in the developing world. Such an approach may be counterproductive if the U.S supports
increased FDI into REIs within developing countries as the consequences of doing so could
exacerbate problems instead of solving them.
“Climate change may be the single factor that makes the future very different, impeding
the continuing progress in human development" (Elliot and Tran 2010). This statement made
from Jeni Klugman, the Director of the Human Development Report office for the UN
demonstrates how international actors tend to view environmental issues in the context of long
term and global repercussions. The basic intent of this paper is to display the need for policy
focus on the intrinsic ties of human welfare and the environment, and to provide evidence that
foreign investment into extractive industries results in a disruption of both elements. However,
no matter what progressive steps will be made tomorrow, the carelessness toward the wellbeing
of Mr. Pirri and his fellow citizens is an attack on their livelihood that was uninvited and
20
unprovoked. Such injustice will forever stain the planet’s history. Policy framers should keep
this profound reality in mind before continuing to allow profitability to transcend human value.
21
References
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Results
25
Table 1: Observed countries
Argentina
Chad
India
Azerbaijan
Chile
Kazakhstan
Bolivia
Colombia
Mauritania
Botswana
Ecuador
Mexico
Brazil
Honduras
Morocco
Mozambique
Peru
Tunisia
Nicaragua
Philippines
Uganda
Nigeria
South Africa
Venezuela
Pakistan
Thailand
Singapore
Papua New
Guinea
Trinidad
Swaziland
Figure 1: Scatterplot of the relationship between FDI into REIs and protected land
Figure 2. Scatterplot of the relationship between mineral and oil rents and protected land.
26
Figure 3: Scatterplot of the relationship between FDI into REIs and Arable land
Figure 4: Scatterplot of the relationship between mineral and oil rents and arable land.
27
Figure 5: Scatterplot of the relationship between FDI in REIs and improved water source
28
Figure 6: Scatterplot of the relationship between Mineral and oil rents and improved water source
Figure 7: Scatterplot of the relationship between FDI in REIs and Co2 intensity
29
Figure 8: Scatterplot of the relationship between mineral and oil rents and Co2 intensity
Figure 9: Scatterplot of the relationship between FDI into REIs and HDI value
Figure 10: Scatterplot of the relationship between Mineral and Oil rents and HDI value.
30
Figure 11. Comparison of institutional type and protected land effect
31
Figure 12: Comparison of institutional type effect on arable land
Figure 13: Comparison of Institutional type effect on Co2 intensity
Figure 13: Comparison of Institutional type effect on improved water source
32
Figure 14: Comparison of Institutional type effect on HDI value
33