Applied Economics, 2012, 44, 2597–2606

The lesser of two evils: an empirical

investigation of foreign direct
investment-pollution tradeoff
Myeong Hwan Kim* and Nodir Adilov
Department of Economics, Indiana University-Purdue University Fort
Wayne, 2101 E Coliseum Boulevard, Fort Wayne, IN 46805, USA

This article investigates the relationship between Foreign Direct

Investment (FDI) and pollution measured by carbon dioxide (CO2)
emissions. The results suggest that while lax environmental regulations
might attract FDI, the foreign companies utilize less polluting technology
as compared to local firms in low-income countries. Thus, FDI does not
necessarily increase pollution levels in the host countries. The findings,
therefore, simultaneously support the pollution haven and the pollution
halo hypotheses.

Keywords: FDI; pollution; environment and development

JEL Classification: F21; Q53; Q56

I. Introduction There are several reasons to suspect a tradeoff

For many developing countries, Foreign Direct
Investment (FDI) plays a vital role for economic
development. However, there is a concern that faster
rates of economic development fuelled by FDI may
put a greater strain on country’s natural resources
and environment. Developing countries that attract
foreign investments might also be attracting pollution
since environmental standards are usually weaker in
developing countries as compared to developed
countries. This argument is known as a ‘pollution
haven’ hypothesis,1 and it implies that multinational
corporations prefer to locate their production facil-
ities in countries with relaxed environmental stan-
dards. This article empirically analyses the tradeoff
between FDI and pollution, and tests the validity of
the pollution haven hypothesis.
between FDI and pollution. An inflow of FDI
positively affects economic growth. In turn, higher
rates of economic growth are associated with greater
consumption of natural resources, such as fossil fuels,
and thus could correspond to greater pollution levels.
Furthermore, to minimize costs multinational com-
panies might choose to relocate from a ‘strict’
environmental standards country to a ‘weak’
environmental standards country. While cheap
labour is one of the main factors that drive the
firms’ relocation decisions, lax environmental
regulations could play a pivotal role in the firms’
decisions as well – pollution permits in developed
economies are more expensive as compared to the
permits in less-developed economies. In addition,
FDI brings in not only labour-intensive industries
such as textiles but also pollution-intensive

*Corresponding author. E-mail: kimm@ipfw.edu

1
The pollution haven hypothesis was first introduced by Tobey (1990), and Copeland and Taylor (1994) proposed the first
complete model of the hypothesis.
Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online ß 2012 Taylor & Francis 2597
http://www.informaworld.com
DOI: 10.1080/00036846.2011.566187
2598
industries such as petrochemicals. It has been argued
that many ‘dirty’ industries, such as paper, petro-
chemicals and steel moved from industrialized to
developing countries, which tend to be ‘pollution-
friendly’ business environments. This ‘pollution-
friendly’ business environment offers strategic advan-
tages for developing countries in attracting FDI.2
China provides anecdotal evidence in support of this
argument because the country’s environment pollu-
tion levels increased corresponding to high levels of
FDI and economic growth.
An increase in FDI does not necessarily need to
lead to a rise in pollution levels. Multinational
companies can also export ‘greener’ technologies or
‘greener’ environmental standards from developed to
developing countries and conduct business in an
environmentally friendly manner in hosting coun-
tries. This argument is known as a ‘pollution halo’
hypothesis.3 The pollution halo hypothesis is plausi-
ble for several reasons. First, the host countries might
require stricter environmental standards for foreign
companies. Second, foreign companies might choose
to err on the side of caution and produce less
pollution as compared to local companies due to
uncertainty regarding local regulations or in order to
please local governments. Third, foreign firms might
possess newer and less polluting production methods
as compared to local firms. Fourth, foreign compa-
nies might desire to use less polluting technologies in
order to avoid backlash from constituencies in their
home countries.
This article tests the validity of both the pollution
haven and the pollution halo hypotheses by using
country-level data from 164 countries for over 44
years. The main contributions of this article are that
it reconciles the contradictory predictions of the two
hypotheses and shows that the effects of FDI on
pollution vary by geographic region and by the
country’s income level. We use carbon dioxide (CO2)
levels to measure pollution because CO2 is known as
one of the main contributors to global warming.
Some researchers argue that even the current global
CO2 level of 385 parts-per-million (ppm, 106) is too
high and should be reduced to 350 ppm in order to
maintain the current climate.4 Furthermore, the data
on CO2 are more readily available than data on other
pollutants such as sulfur dioxide (SO2) and nitrous
oxide (NO2).5 Many studies, therefore, use CO2 data
2
See Earnhart and Lizal (2006).
3
The multinational firms diffuse their clean technology in developing/hosting countries through the export of modern
technologies (Birdsall and Wheeler, 1993). Yet, empirical support for the pollution halo hypothesis is lacking in the macro-
comparative contexts (Letchumanan and Kodama, 2000).
4
See Hansen et al. (2008).
5
See Hoffmann et al. (2005).
6
See Cornes and Sandler (1994), and Kotchen (2005) for more details.
M. H. Kim and N. Adilov
to study the effects of economic factors on pollution.
It should also be noted that pollution control has
impure public good6 aspects. Over time, CO2 and
other greenhouse gases tend to diffuse uniformly
across countries, contributing to both local and
global pollution. Therefore, stricter environmental
regulations in one country reduce pollution levels
both in the host country and globally.
There are many factors besides FDI that might
influence pollution. Gross Domestic Product (GDP)
and population could also affect pollution levels. In
addition, global factors could influence CO2 emission
levels. Specifically, higher world prices for fossil fuel
resources create incentives to utilize energy-efficient
technology. This may reduce pollution. Some coun-
try-specific factors might influence pollution levels as
well. For example, a ratification of the Kyoto
Protocol could indicate the country’s willingness to
take extra steps to reduce the emission levels of
greenhouse gases. Our empirical models control for
the above-mentioned factors.
The rest of this article is organized as follows.
Section II presents literature review. The data and
methodology are provided in Section III. Section IV
discusses the results, and Section V provides con-
cluding remarks.
II. Literature Review
The literature on environmental effects of FDI uses
various approaches and provides contradictory
results. While most studies investigate the empirical
evidence on the pollution haven hypothesis,
Markusen et al. (1993), Markusen (1997), and Ulph
and Valentini (1997) provide theoretical evidence for
the hypothesis. Desrochers (2007) argues that eco-
nomic activities have negative effect on environment
and that previous industrial movements resulted in
increased pollution.
Cole et al. (2006) investigate the relationship
between FDI and pollution by estimating a political
economy model with imperfect product market com-
petition. The authors find that the effect of FDI on
environmental pollution is related to the corruption
of the local government. Specifically, the authors
argue that FDI strengthens (weakens) local
The lesser of two evils
environmental regulation in countries with low (high)
levels of corruption.
Holtz-Eakin and Selden (1995) empirically analyse
the relationship between economic growth and
carbon dioxide emissions. The authors find that
carbon dioxide emissions exhibit decreasing marginal
propensity to emit as per capita GDP increases.
However, this article argues that it is unlikely the CO2
emissions would level off over time. The authors
estimate that CO2 emissions will continue to grow
1.5–2% per year due to a rapid population growth in
lower-income countries with relatively higher mar-
ginal propensity to emit.
Hoffman et al. (2005) use the Granger causality test
and show that there is no clear causality link between
FDI and pollution. The authors argue that while
long-time series data are needed for the Granger
causality tests, current improvements in the tech-
niques of the Granger causality test allow the use of
short time series with panel data. Specifically, the
authors use the panel data for 112 countries for the
years between 1971 and 1999. This article’s findings
are consistent with the hypothesis that low-income
countries with high CO2 levels attract FDI, while the
analyses do not support the argument that high-
income countries are pollution havens.
Wheeler (2004) shows that contrary to the belief
that globalization weakens environmental standards
due to the threats from polluting firms to relocate to
countries with weaker environmental standards, air
pollution levels in large cities in the US, Brazil, China
and Mexico declined over time. The author argues
that the cost-benefit analysis justify stricter environ-
mental regulation even in low-income countries.
Thus, the findings contradict the ‘race to the
bottom’ hypothesis that globalization erodes envi-
ronmental standards.
A study by Smarzynska and Wei (2001) does not
find support for the pollution haven hypothesis. The
authors provide several reasons for their findings.
They argue that countries with weak environmental
regulations may deter foreign investment due to
higher corruption levels. In addition, most studies
analyse country-level data that may conceal impor-
tant firm-level effects. Furthermore, the authors note
several difficulties related to measuring pollution
levels and environmental standards in the host
countries.
He (2006) researches the effects of FDI on indus-
trial SO2 pollution in China from 1991 to 2003. The
author rejects the hypothesis that China provides a
pollution haven for foreign firms. On the other hand,
Akbostanci et al. (2007) study finds evidence that
7
Using the Taylor approximation, ln(1 þ x)  x for small x.
2599
Turkey provides a pollution haven for dirty indus-
tries. Specifically, the study shows that demand for
Turkish export industries increases as the dirtiness of
manufacturing industries in Turkey increases.
III. Model and Data
The following model is used to examine the effects of
FDI on carbon dioxide emission levels:
CO2 it ¼ 0 þ 1 Productive FDIit þ 2 GDPit
þ 3 Populationit þ 4 Kyotoit
þ 5 Oil Priceit þ "it ð1Þ
In Equation 1, CO2 denotes the per capita growth
rate of CO2 emissions in country i at time t, FDI
denotes the per capita growth rate of net productive
FDI for country i at time t, GDP denotes the growth
rate of per capita GDP for country i at time t,
Population denotes the growth rate of population for
country i at time t, Kyoto denotes a dummy variable
that takes the value of one if the country has ratified
the Kyoto Protocol at or before time t, Oil price
denotes the growth rate of oil price at time t, and 
denotes the vectors of nuisance coefficients.
Furthermore, "it represents the omitted influences
on the growth rate of CO2 and is assumed to be well
behaved. We use country fixed effects to control for
any country-specific effects that shift the level of CO2
differently for different countries. For example,
differences in environmental standards or abatement
costs across countries would be captured by country-
specific effects. Oil price changes could also affect
emission levels because countries are more inclined to
consume oil, and thus increase pollution, when oil
prices fall. In addition, a traditional approach would
use the log differences in variables instead of growth
rates. Since net FDI can take both positive and
negative values, the use of a model with log differ-
ences is not feasible. However, the interpretation of
our model is similar to the interpretation of the model
with log differences because a log difference approx-
imates the growth rate for small percentage changes.7
The final specification of the model was obtained
from ‘general-to-specific’ specification search, which
was particularly popularized by Hendry (1980, 1995),
Hendry and Mizon (1990), and Mizon (1995).
Hendry and Krolzig (2001) recommend the use of
multiple search paths in the process of moving from a
Generalized Unrestricted Model (GUM) to a parsi-
monious specification. The reasons for this
2600 M. H. Kim and N. Adilov
Table 1. Regression results

Variables OLSa Fixed effects Random effects Developeda Developinga

Productive FDI p/c 3.47E04*** 3.47E04 2.81E04 0.006* 3.46E04***
(9.20E05) (7.61E04) (7.50E04) (0.003) (9.20E05)
GDP p/c 0.442*** 0.442*** 0.626*** 0.493*** 0.439***
(0.098) (0.090) (0.083) (0.125) (0.101)
Population 0.366 0.366 0.855** 0.023 0.364
(0.437) (0.655) (0.369) (1.158) (0.454)
Kyoto 2.351 2.351 2.520 1.529 2.557
(3.504) (1.788) (1.695) (1.026) (4.217)
Oil price 0.022 0.022 0.018 0.000 0.026
(0.021) (0.019) (0.019) (0.014) (0.023)
Constant 2.525*** 2.525* 0.001 0.198 3.062***
(0.876) (1.298) (0.876) (1.115) (1.025)
Observations 4110 4110 4110 766 3344
R2 0.057 0.012 0.016 0.090 0.056

Notes: SEs are in parentheses.

a
Linear regression absorbing by country and clustering by year.
*, ** and *** denote statistical significance at 10, 5 and 1% levels, respectively.

recommendation are to avoid the risk of deleting an Convention on Climate Change (UNFCCC) web-
important variable that should ideally be retained in site.9 Note that most countries signed the Kyoto
the final model specification along any single search Protocol only in late 1990s and early 2000s.
path and to minimize the risk of retaining too many Therefore, the mean value for the Kyoto dummy is
variables as proxies for the missing variable with the 0.09. Table A1 in the Appendix presents descriptive
result that the final model is over-parameterized. This statistics for the data. The correlation coefficients of
approach is ideally suited for the search of unspeci- variables used in estimation of Equation (1) are
fied functions when the underlying theory is suffi- provided in Table A2 in the Appendix. The simple
ciently loose to admit a wide range of candidate average correlation among the independent variables
regressors. Therefore, the final form of each term in is 0.047 (and equals 0.105 using absolute values).
our generic Equation 1 is determined by parsimony, a A low correlation would allow for some justification
satisfactory performance against diagnostic tests of the argument that we have constructed economic
incorporated with the Schwarz criterion. variables that are mostly uncorrelated with other
Data on CO2 emissions measured in metric kilo- variables. Our dataset includes observations from 164
tons per year were obtained from the World countries from 1961 to 2004.10 The list of countries in
Development Indicators (WDI) database developed the dataset is provided in Table A3 in the Appendix.
by the World Bank Group. Similarly, data on FDI,
GDP and population levels were obtained from the
WDI database.8 FDI and GDP are measured in US
dollars for the year 2000. Note that FDI in our model IV. Results
measures productive investment and does not include
financial investment because productive FDI is a The estimates of Equation 1 using the Ordinary Least
more relevant variable for pollution. Oil price data Squares (OLS)11 method on the pooled data set are
were obtained from the Federal Reserve Bank of shown in Table 1. Consistent with the research on
St. Louis (Federal Reserve Economic Data, FRED). macroeconomic factors that affect pollution levels,
The list of countries that ratified the Kyoto Protocol GDP per capita growth rate has positive and signif-
is available from the United Nations Framework icant effect (at 1% level) on CO2 emissions. Thus, an
8
Available at www.worldbank.org/data/onlinedatabases/onlinedatabases.html.
9
Available at http://unfccc.int/2860.php.
10
The data covers the years 1961 to 2004, as that is the range of available data for the CO2.
11
We estimate the model using the OLS absorbing by country and clustering by time. Absorb option specifies the categorical
variable which is to be included in the regression as if it were specified by dummy (also called indicator) variables. Cluster
option specifies that the observations are independent across groups (clusters) but not necessarily independent within groups.
In addition, cluster variable specifies to which group each observation belongs.
The lesser of two evils 2601
Table 2. Regression results by continent

Variables Africa Asia Europe North America Oceania South America

Productive FDI p/c 2.59E04** 0.030* 0.020* 0.006 0.066 0.005
(1.11E04) (0.016) (0.011) (0.004) (0.066) (0.025)
GDP p/c 0.183 0.892*** 0.615** 0.698*** 0.728** 0.559***
(0.165) (0.160) (0.247) (0.215) (0.283) (0.105)
Population 0.194 0.025 0.467 2.369 1.974 0.451
(0.712) (0.677) (1.355) (1.867) (1.765) (1.632)
Kyoto 14.000 1.434 1.879 1.052 2.433 2.849
(17.182) (1.538) (1.154) (2.032) (2.521) (1.898)
Oil price 0.055 0.008 0.009 0.029 0.048 0.019
(0.040) (0.021) (0.017) (0.024) (0.037) (0.023)
Constant 2.922 0.336 1.172 4.452 5.024 2.923
(2.003) (1.514) (1.229) (3.437) (3.633) (3.048)
Observations 1356 836 719 315 265 619
R2 0.054 0.170 0.178 0.126 0.048 0.068

Notes: SEs are in parentheses. Linear regression absorbing by country and clustering by year.
*, ** and *** denote statistical significance at 10, 5 and 1% levels, respectively.

upsurge in economic growth rates increases pollution.
However, Population, Kyoto and Oil price variables
have no significant impact on CO2 emission levels.
Note that insignificant coefficient of the Population
variable and a significant coefficient of the GDP
variable indicate that an increase in population
growth rates does not affect per capita CO2 emissions,
but an increase in population increases the overall
CO2 emissions. Interestingly, FDI has negative and
significant effect on carbon dioxide emissions growth
rate at 1% level. It is important to note that FDI is a
part of GDP. Because we control for GDP growth, a
negative coefficient of FDI variable indicates that
FDI is less polluting as compared to other factors
that contribute to economic growth. In other words,
this finding indicates that foreign firms are less
polluting than domestic firms.
Earlier studies investigating the effects of FDI on
pollution also suggest that economic factors and FDI
might affect pollution differently in high-income and
in low-income countries.12 To examine this premise,
we separate our sample into developed and develop-
ing countries.13 Then, the OLS regressions are run
separately for developing and developed countries,
and the results are presented in Table 1. Consistent
with our earlier results, GDP increases CO2 emissions
growth rate both for developing and developed
countries. FDI, on the other hand, increases carbon
dioxide emissions growth rate in developed countries
(at 10% level) and decreases the emissions growth
rate in developing countries (at 1% level).
12
See Holtz-Eakin and Selden (1995) and Hoffman et al. (2005).
13
We follow the International Monetary Fund (IMF) in defining countries as ‘industrial’ if they have an International
Financial Statistics (IFS) country code less than 200. By definition the industrial country is a developed country.
The findings have an intriguing interpretation. The
findings imply that foreign companies are less
polluting as compared to local firms in developing
countries, and thus FDI spreads cleaner technology
in these countries. This is consistent with the pollu-
tion halo hypothesis. However, the coefficient of FDI
variable is positive and significant in developed
countries, implying that FDI increases CO2 pollution
in developed countries. We offer several intuitive
explanations for this result. First, foreign companies
relocating from one developed country to another
may prefer countries with less stringent environmen-
tal standards. Second, a multinational company
might be outsourcing its operations from a developed
country with strict environmental regulations to a
developing country with weak environmental regula-
tions. Thus, an inflow of FDI increases pollution
growth rates and an outflow of FDI reduces pollution
growth rates in developed countries. Both explana-
tions of a positive FDI coefficient in developed
countries are consistent with the pollution haven
hypothesis. The findings, therefore, simultaneously
support the pollution halo and the pollution haven
hypotheses.
In order to investigate the effects of FDI on
pollution in different continents, we run regressions
separately for Africa, Asia, Europe, North America,
Oceania and South America. The results are pre-
sented in Table 2. All regressions include country
dummy variables. Consistent with our earlier find-
ings, GDP increases per capita pollution rates, while
2602 M. H. Kim and N. Adilov
Table 3. Results with net outflow and inflow of FDI

Outflow (FDI5$0) Inflow (FDI4$0)

Variables All Developed Developing All Developed Developing

Productive FDI p/c 0.065 0.183 0.065 3.94E04*** 0.006* 3.93E04***
(0.093) (0.393) (0.092) (9.46E05) (0.003) (9.49E05)
GDP p/c 0.114 0.760* 0.105 0.470*** 0.524*** 0.467***
(0.165) (0.379) (0.165) (0.106) (0.131) (0.110)
Population 0.805 3.472 0.700 0.273 0.014 0.276
(1.064) (2.346) (1.091) (0.470) (1.197) (0.489)
Kyoto 1.385 0.329 2.437 2.430 1.797* 2.579
(4.397) (3.205) (4.831) (3.652) (0.981) (4.388)
Oil price 0.108** 0.035 0.117* 0.015 0.000 0.018
(0.053) (0.057) (0.058) (0.021) (0.015) (0.024)
Constant 1.645 3.427 1.238 2.476** 0.331 3.074***
(2.182) (2.661) (2.450) (0.939) (1.141) (1.106)
Observations 304 35 269 3801 731 3070
R2 0.137 0.501 0.137 0.058 0.093 0.057

Notes: SEs are in parentheses. Linear regression absorbing by country and clustering by year.
*, ** and *** denote statistical significance at 10, 5 and 1% levels, respectively.

Population, Kyoto and Oil price have no statistically
significant effect on pollution. The coefficients of the
FDI variable are insignificant for North America,
Oceania and South America, significant and negative
at 5% level for Africa, and significant and positive at
10% level for Europe and Asia. This confirms our
prior finding that foreign investment might have
different effects on pollution in different countries.
The only unexpected result is that the coefficient of
GDP variable is insignificant for African countries.
This could be partially explained by the fact that
African countries have lower carbon dioxide emis-
sions as compared to countries in other continents.
We also analyse the implications of net FDI inflow
and outflow. To perform this analysis, we divide the
data into two samples: observations with net FDI
inflow and with net FDI outflow. Table 3 presents
regression results. The regressions are run separately
for developing and developed countries and for all
countries, a sample that pools the data for developed
and developing countries. First, consider the results
for the pooled data. The effect of net FDI outflow is
insignificant. This could indicate that industries
leaving the country do not necessarily have greater
contribution to CO2 emissions growth rates as
compared to the industries remaining in the country.
On the other hand, net FDI inflow has significant
negative effect on CO2 at 1% level. This finding is
consistent with the pollution halo hypothesis.
Similar to our earlier results, Population and Kyoto
do not have significant effect on CO2. As expected,
GDP has significant positive effect on CO2 emissions
growth rate at 1% level for countries with net
FDI inflow. For countries with net FDI outflow,
however, GDP has no significant effect on pollution,
while Oil price has significant and positive effect on
pollution at 5% level. This result is surprising,
because we expected that an increase in energy
prices would reduce the use of energy resources and
pollution levels. On the other hand, an increase in oil
prices could be positively correlated with pollution as
well if oil prices are increasing due to increased
consumption of oil.
Next, consider the effects of net FDI inflow and
outflow for developed and developing countries. Net
FDI inflow has significantly positive effect (at 10%
level) on CO2 growth rate in developed countries, and
net FDI inflow has significantly negative effect (at
1% level) on CO2 growth rate in developing
countries. These findings are consistent with the
arguments that exported industries are not necessarily
more polluting than the remaining industries. Yet, the
‘imported’ industries are less polluting than domestic
industries in developing countries and more polluting
than domestic industries in developed countries.
V. Summary and Conclusions
The goal of this article was to investigate the role of
FDI and other macroeconomic factors on increase in
carbon dioxide pollution levels. Summarizing our
findings, the empirical examination of the effects of
FDI on pollution supports both the pollution haven
and the pollution halo hypotheses. The main
The lesser of two evils
contribution of this article is that it shows that these
two hypotheses are not contradictory. Overall, FDI
has negative or no effect on CO2. Since our regres-
sions include the GDP growth rate variable, a
negative or insignificant coefficient of the FDI
variable is consistent with the argument that foreign
companies are no more polluting than domestic
companies and that FDI may spread greener
technologies to developing countries. On the other
hand, FDI increases carbon dioxide growth rates in
developed countries. This finding is consistent with
the pollution haven hypothesis. Of course, simply
outsourcing production from a developed country to
a developing country does not reduce global CO2
levels and therefore this underscores the need for
global approach to pollution regulation. From a
developing country’s perspective, however, an
increase in GDP achieved through cleaner foreign
technology could be preferable even if the foreign
firms are relocating to developing countries in search
of pollution havens.
Analysing other factors that influence carbon
dioxide emission levels, we find that the Kyoto
variable has an insignificant effect on CO2 growth
rates. This could indicate that the ratification of the
Kyoto Protocol does not necessarily reduce pollution
rates. GDP has positive effect on CO2 emissions. The
result is consistent with the literature on this topic
and implies that an increase in economic activity
increases pollution.14 The Oil price variable generally
has an insignificant effect on CO2 emissions,
indicating that oil price increases, while providing
incentives to utilize energy-efficient methods of
production and consumption, do not necessarily
reduce pollution.
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Appendix

Table A1. Descriptive statistics (all sample and by continent)

Variables Observation Mean SD Minimum Maximum

All sample CO2 p/c 4277 3.718 4.984 0.010 49.280
Productive FDI p/c 4277 229.985 4117.375 2726.543 199324.700
GDP p/c 4277 5171.253 7538.644 56.468 49996.100
Population 4277 33 600 000 118 000 000 40 130 1 300 000 000
Kyoto 4277 0.091 0.288 0.000 1.000
Oil price 4277 38.009 18.725 15.770 98.070
Africa CO2 p/c 1405 0.918 1.878 0.010 11.813
Productive FDI p/c 1405 27.096 156.997 451.603 3510.486
GDP p/c 1405 884.778 1249.177 56.468 8575.979
Population 1405 13 100 000 18 200 000 54 835 138 000 000
Kyoto 1405 0.052 0.222 0.000 1.000
Oil price 1405 38.591 18.951 15.770 98.070
Asia CO2 p/c 879 4.783 6.215 0.028 40.363
Productive FDI p/c 879 135.167 584.279 526.415 9265.987
GDP p/c 879 4479.003 7158.047 135.402 38236.000
Population 879 99 700 000 241 000 000 253 448 1 300 000 000
Kyoto 879 0.099 0.299 0.000 1.000
Oil price 879 36.100 17.649 15.770 98.070
Europe CO2 p/c 752 7.642 2.923 1.146 24.857
Productive FDI p/c 752 906.662 9768.623 2726.543 199324.700
GDP p/c 752 14526.380 8983.049 479.680 49996.100
Population 752 17 900 000 22 600 000 121 721 82 500 000
Kyoto 752 0.122 0.328 0.000 1.000
Oil Price 752 37.397 18.378 15.770 98.070
North America CO2 p/c 325 7.679 8.183 0.416 49.280
Productive FDI p/c 325 127.796 218.616 264.944 2154.392
GDP p/c 325 8430.497 8638.816 899.507 36274.940
Population 325 39 400 000 75 500 000 196 903 294 000 000
Kyoto 325 0.135 0.343 0.000 1.000
Oil price 325 39.905 20.029 15.770 98.070
Oceania CO2 p/c 274 3.413 5.098 0.039 19.069
Productive FDI p/c 274 103.847 202.919 41.725 1823.807
GDP p/c 274 4523.751 5968.222 345.866 22847.100
Population 274 4 320 324 5 442 845 92 450 20 100 000
Kyoto 274 0.088 0.283 0.000 1.000
Oil price 274 38.173 18.978 15.770 98.070
South America CO2 p/c 642 1.914 1.441 0.253 8.448
Productive FDI p/c 642 116.768 243.570 92.508 2171.923
GDP p/c 642 3168.273 2210.846 605.165 9428.648
Population 642 15 500 000 32 200 000 40 130 184 000 000
Kyoto 642 0.109 0.312 0.000 1.000
Oil price 642 39.036 19.098 15.770 98.070
The lesser of two evils 2605
Table A2. Variable correlations (all sample and by continent)

Variables CO2 p/c Productive FDI p/c GDP p/c Population Kyoto Oil price
All Sample CO2 p/c 1.000
Productive FDI p/c 0.117 1.000
GDP p/c 0.695 0.177 1.000
0.010 0.011 0.008 1.000
Kyoto 0.034 0.081 0.069 0.008 1.000
Oil price 0.017 0.013 0.019 0.006 0.076 1.000
Africa CO2 p/c 1.000
Productive FDI p/c 0.276 1.000
GDP p/c 0.761 0.418 1.000
0.096 0.083 0.100 1.000
Kyoto 0.076 0.223 0.110 0.012 1.000
Oil price 0.024 0.030 0.001 0.075 0.049 1.000
Asia CO2 p/c 1.000
Productive FDI p/c 0.245 1.000
GDP p/c 0.579 0.400 1.000
0.171 0.084 0.141 1.000
Kyoto 0.076 0.011 0.029 0.016 1.000
Oil price 0.053 0.039 0.016 0.031 0.044 1.000
Europe CO2 p/c 1.000
Productive FDI p/c 0.290 1.000
GDP p/c 0.472 0.229 1.000
0.226 0.047 0.109 1.000
Kyoto 0.111 0.150 0.122 0.028 1.000
Oil Price 0.038 0.018 0.006 0.056 0.066 1.000
North America CO2 p/c 1.000
Productive FDI p/c 0.404 1.000
GDP p/c 0.757 0.437 1.000
0.495 0.177 0.737 1.000
Kyoto 0.051 0.228 0.093 0.117 1.000
Oil price 0.056 0.217 0.053 0.031 0.163 1.000
Oceania CO2 p/c 1.000
Productive FDI p/c 0.584 1.000
GDP p/c 0.971 0.683 1.000
0.849 0.401 0.770 1.000
Kyoto 0.105 0.001 0.078 0.157 1.000
Oil price 0.046 0.109 0.034 0.048 0.093 1.000
South America CO2 p/c 1.000
Productive FDI p/c 0.205 1.000
GDP p/c 0.671 0.419 1.000
0.027 0.127 0.036 1.000
Kyoto 0.027 0.126 0.062 0.026 1.000
Oil price 0.076 0.190 0.085 0.016 0.118 1.000
2606 M. H. Kim and N. Adilov
Table A3. List of the countries in sample

Albania Czech Republic Kenya Rwanda

Algeria Denmark Korea Republic Samoa
Angola Djibouti Kuwait Saudi Arabia
Antigua and Barbuda Dominica Lao PDR Senegal
Argentina Dominican Republic Latvia Seychelles
Armenia Ecuador Lebanon Sierra Leone
Australia Egypt, Arab Republic Liberia Singapore
Austria El Salvador Lithuania Slovak Republic
Azerbaijan Equatorial Guinea Luxembourg Slovenia
Bahamas, The Eritrea Macao, China Solomon Islands
Bahrain Estonia Madagascar South Africa
Bangladesh Ethiopia Malawi Spain
Barbados Fiji Malaysia Sri Lanka
Belarus Finland Maldives Saint Kitts and Nevis
Belgium France Mali Saint Lucia
Belize Gabon Malta Saint Vincent and the Grenadines
Benin Gambia, The Mauritania Sudan
Bhutan Georgia Mauritius Swaziland
Bolivia Germany Mexico Sweden
Bosnia and Herzegovina Ghana Moldova Switzerland
Botswana Greece Mongolia Tajikistan
Brazil Grenada Morocco Tanzania
Bulgaria Guatemala Mozambique Thailand
Burkina Faso Guinea Nepal Togo
Burundi Guinea-Bissau The Netherlands Tonga
Cambodia Guyana New Zealand Trinidad and Tobago
Cameroon Haiti Nicaragua Tunisia
Canada Honduras Niger Turkey
Cape Verde Hong Kong, China Nigeria Turkmenistan
Central African Republic Hungary Norway Uganda
Chad Iceland Oman Ukraine
Chile India Pakistan United Kingdom
China Indonesia Panama United States
Colombia Iran, Islamic Republic Papua New Guinea Uruguay
Comoros Ireland Paraguay Uzbekistan
Congo, Democratic Republic Israel Peru Vanuatu
Congo, Republic Italy Philippines Venezuela, RB
Costa Rica Jamaica Poland Vietnam
Cote d’Ivoire Japan Portugal Yemen, Republic
Croatia Jordan Romania Zambia
Cyprus Kazakhstan Russian Federation Zimbabwe
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