The two-way linkage between foreign direct investment and environmental pollution in Vietnam - from sectoral perspectives

Abstract

Two-way linkage between foreign direct investment (FDI) and environmental pollution is a topic that has attracted a great deal of attention of economists. Nevertheless, there are few quantitative studies which indentify the relationship between FDI and environmental pollution using sectoral data. Utilizing that kind of data with the General Methods of Moments (GMM) regression method, this paper affirms the existence of two-way linkage between FDI and environmental pollution. Specifically, FDI is found to cause an increase in the level of pollution, which is measured by the emission of greenhouse gases (GHG) for each economic sector, while the higher degree of pollution also boosts up the amount of FDI flows into Vietnam. Besides, the paper finds that: (i) There is a Kuznets Curve’s inverted U-shaped relationship between pollution level and economic growth in general but not for the sector of energy; (ii) Energy sector experiences a rise in the degree of pollution while attracting a large amount of FDI;(iii) Within the energy sector, the sub-sector of production & distribution of electricity, gas and water has received a limited value of FDI. Based on these results, some policy recommendations will be made for Vietnamese government to attract more FDI but still reduce pollution levels...