Volume 2, ISSUE2/2011 - Review of Applied Socio-Economic ...

Pag׀ 144 ISSN: 2247-6172ISSN-L: 2247-6172Review of Applied Socio- Economic Research(Issue 2/ 2011)URL: http://www.reaser.eue-mail: editors@reaser.eucountry has a comparative advantage in the industries burdening the environment, or on the contrary, in “ecofriendly”industries, as well as on the level of the environmental standards commonly applied in the host country.Income effect, caused by an increased employment rate, incomes of the population in the host country, aswell as public budget revenues, has a positive impact on the environment. It is assumed that the increase inincomes is also enhancing the demand for environmental quality, what under the pressure of public opinionchallenges the government to stiffen up the environmental standards and more consistently ensure theirobservance, 133 as well as to invest in the control systems and prevention of environmental damage. Increase inpublic budget revenues also solves the problem of funds for environmental investment.Estimation of the FDI impact on the environment of the host country anticipates execution of a detailedeconomic and environmental analysis that will state the finite impact of the above mentioned effects.One of the concepts clarifying the impact of FDI on the environment is the so-called environmentalKuznets curve (EKC), which was elaborated on by Grossman and Krueger. 134 EKC expresses dependence of theenvironment pollution level on the income per capita. 135 This dependence has the shape of upside-down letter“U . That means that the economic growth may cause environmental problems rather in relatively poorcountries, but pollution levels tend to stop at certain stage and then gradually decline, because a demand for theenvironmental quality tends to rise with high incomes. Grossman and Krueger differentiated 3 sources ofeconomic growth impact on the environment: the effect of production volume (economic growth), structuraleffect and effect of technology, which included also the income effect. Validity of the curve was proved alsoempirically and concurrently an approximate income level, at which the pollution levels start to decline, wascalculated. 136Validity of EKC cannot be generalized. Its anticipated shape is valid only for some substances. 137 Forexample it is not valid for substances that have been the cause of global environment pollution (e.g. CO 2emissions).2.4. Environmental standards as a competitive “fighting” tool for foreign direct investmentLiberalization of international trade and investment has led to a significant increase in FDI volume and to amore severe competitive “fighting” for foreign investment among the countries. FDI inflow is generally evaluatedpositively in the host countries, therefore the countries endeavour to attract as many foreign investors as possible.In their effort to pass muster in this “fighting”, they offer various financial or qualitative investment incentives, orin common practice they change the commonly applied environmental standards. Investors can be motivatedeven before their “pre-entry”, for example by an existing legislative and regulatory framework, licencerequirements, etc., or post-entry, e.g. by the requirements to observe the legal rules, the consequent regulation ofthe respective industry, etc.In common practice, it is generally complicated to identify the correlation between FDI inflow and theextent of environmental regulation and to answer the question if there exists competitive fighting for FDI viaenvironmental regulation among the countries. More stringent regulations may be influenced by several factors,including the local and community “pressures” or requirements of the private sector. On the other hand, theabsence of legislation may be related to the institutional deficits, limited financial resources, as well as to the lackof political willingness to solve environmental problems.At present the best known competitive “fighting” policies for FDI among countries are the following:- the “race to the bottom” policy,- the “regulatory chill” policy,- the “race to the top” policy.133 Liang, F. H.: Does Foreign Direct Investment Harm the Host Country’s Environment? Evidence from China, Nov. 2008. Available at:.134 grossman, G. M., Krueger, A. B.: Environmental Impacts of a North American Free Trade Agreement. NBER working paper No. 3914,Nov. 1991.Authors came out from the original Simon Kuznets curve expressing the relationship between the income per capita and the rate of inequalityin the distribution of wealth.135 EKC is stated here, because FDI is (mainly in developing countries) an important factor contributing to the economic growth.136 The calculated income level per capita was for a majority of investigated types of emissions on the level of nearly USD 8,000.137 Grossman, G. M., Krueger, A. B.: Economic Growth and the Environment. NBER working paper No. 4634, Feb. 1994.Also the above mentioned empirical study of EKC authors was related only to the local air emission in the towns.