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 sub-

Saharan 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.

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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 oil-

abundant 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

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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 “Push-

Pull” 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

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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.

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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.

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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

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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

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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

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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

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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

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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.

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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).

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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’

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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

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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

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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.

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References

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Results

Table 1: Observed countries

Argentina Azerbaijan Bolivia Botswana BrazilChad Chile Colombia Ecuador HondurasIndia Kazakhstan Mauritania Mexico Morocco

Mozambique Nicaragua Nigeria PakistanPapua New

GuineaPeru Philippines South Africa Thailand Trinidad

Tunisia Uganda Venezuela Singapore Swaziland

Figure 1: Scatterplot of the relationship between FDI into REIs and protected land

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Figure 2. Scatterplot of the relationship between mineral and oil rents and protected land.

Figure 3: Scatterplot of the relationship between FDI into REIs and Arable land

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Figure 4: Scatterplot of the relationship between mineral and oil rents and arable land.

Figure 5: Scatterplot of the relationship between FDI in REIs and improved water source

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Figure 6: Scatterplot of the relationship between Mineral and oil rents and improved water source

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Figure 7: Scatterplot of the relationship between FDI in REIs and Co2 intensity

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

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Figure 10: Scatterplot of the relationship between Mineral and Oil rents and HDI value.

Figure 11. Comparison of institutional type and protected land effect

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Figure 12: Comparison of institutional type effect on arable land

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Figure 13: Comparison of Institutional type effect on Co2 intensity

Figure 13: Comparison of Institutional type effect on improved water source

Figure 14: Comparison of Institutional type effect on HDI value

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34