Skip to main content

Advertisement

SpringerLink
Log in

The Dynamics of Foreign Direct Investments in Land and Pollution Accumulation

  • Published:
Environmental and Resource Economics Aims and scope Submit manuscript

Abstract

Following the recent increase of foreign direct investments in land, this paper studies their possible effects on the development of a local economy. To this aim, we use a two-sector model (external and local) with heterogeneous agents: external investors and local land owners. We assume that both sectors are negatively affected by pollution, but only the external sector is polluting. The local government can tax the external sector’s production activities to finance environmental defensive expenditures. We first examine the equilibria that emerge in the model from the dynamics of pollution and physical capital, and then investigate the conditions for the coexistence of the two sectors and the impact of the external sector on the revenues of the local population. Using numerical simulations, we show that a revenue-increasing path may occur only if the pollution tax is high enough and the impact of the external sector on pollution is low enough. Otherwise, foreign direct investments may end up impoverishing the local population.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source: Land Matrix database

Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8

Similar content being viewed by others

Notes

  1. By this term, we refer to FDI in land acquisition to produce agricultural goods in developing countries (Saturnino et al. 2011).

  2. Authors’ own estimations based on data retrieved from http://www.landmatrix.org.

  3. In a study on the drivers of FDI for bio-fuel in Sub-Saharan Africa, Giovannetti and Ticci (2016) have shown that capital is attracted by water abundance, weak institutional framework and ill-defined land property rights.

  4. This dataset considers signed deals in all the acquisitions of land by domestic and international investors larger than 200 hectares for activities spanning from agricultural production to tourist resorts. Although the dataset still suffers from a few problems, such as changes of definitions over time and a degree of uncertainty on some deals, it is an important source of information that can open new research strands in the next few years.

  5. See Oya (2013) for a critical methodological discussion on the empirical literature and databases concerning land grabbing. See also Liao et al. (2016) for a discussion of the shortcomings of the research on land grabbing.

  6. For the sake of simplicity, we suppose that each agent inelastically employs all her labour endowment in the production process, so that the labour input is equal to one in the production function. This simplifying assumption allows to exclude labour from the inputs of the production function and to focus on the land owner’s choice between land and capital, which is the object of our analysis.

  7. An interesting contribution that is germane to this study is the one by Corato et al. (2013) who examine the landholder decision to allocate land between two possible competing and mutually exclusive uses: conservation (leaving land in its pristine state) and development (using it as an input for agricultural production or for commercial forestry). Differently from their study, we assume the existence of two different actors (local land owners and external investors) and that land is used as production inputs of both existing sectors (rather than conserved and left unproductive). Moreover, while that model focuses mainly on the land conversion pace under uncertainty about the value of environmental services and irreversibility of the decisions, here we focus on the effects of external FDI in land on the revenues of local landholders.

  8. Examples of real cases in which the external sector caused serious environmental damages have occurred in Kenya (FIAN 2010), Tanzania (Arduino et al. 2012), Ghana (Williams et al. 2012), and Mozambique (Woodhouse 2012), particularly due to the intensive use of fertilizers and pesticides (both in food crops and bio-fuel production). In other cases the governments of some countries, such as Madagascar, Sudan, and Cambodia (see, Daniel and Mittal 2009; Haralambous et al. 2009) were forced to ask for international food aid relief due to the loss of land productivity of the local sector caused by the external sector’s pollution.

  9. Several other contributions in the literature assume a negative impact of pollution on the output of the economy, using Cobb–Douglas production functions (e.g. Rezai et al. 2012; Hackett and Moxnes 2015; Dao et al. 2017). In particular, Hackett and Moxnes (2015) adopt a formalization that is akin to the one presented here, assuming that pollution-related temperature increase affects total factor productivity through a climate damage multiplier that reduces the overall output. A few theoretical models (e.g. Ikefuji and Horii 2012; Bretschger 2017; Bretschger and Pattakou 2018), moreover, assume that pollution specifically affects capital. For instance, using a two-sector model, Bretschger and Pattakou (2018) assume that pollution stock harms capital and examine the effects of high marginal climate damages that may occur when temperature thresholds are reached.

  10. It is estimated (FAO and ITPS 2015) that about one third of the total land available at the world level is degraded due to erosion, salinization, acidification and chemical pollution of soil.

  11. Notice that in a discrete time model, first land allocation takes place (say, at time t), and then production occurs (at \(t+1\)). In the present context with continuous time, instead, the time horizon collapses to a single instant of time.

  12. As Antoci et al. (2012) have shown, pathological outcomes similar to the ones highlighted in this paper may arise even if we assume that agents are forward looking and can perform intertemporal optimization. This suggests that in the present context, the existence of coordination failures is likely to matter more than the degree of rationality of the agents in driving the findings of the model.

  13. Notice that, if the economy specializes in the external sector, then \(K_{L}=0\) and \(L=0\). If this is the case, from (5) it follows that the saving rate and/or the land rental price would have to be zero at the stationary states, which violates the assumptions underlying the model.

  14. As it will be shown below (see Sect. 6) through numerical simulations, these stationary states are either attractive or saddle points.

  15. Notice that the taxation values reported in Fig. 3a, b are not thresholds levels but numerical examples consistent with the dynamic regimes shown in these figures. On the contrary, \(\tau =0.44\) is a threshold value under the chosen parametrisation such that the number of stationary states changes as taxation overcomes 0.44 (Fig. 3c, d). Similarly, under the chosen parametrization \(\tau =0.1371\) is the threshold level beyond which an additional attractive stationary state \(A^{l}\) emerges as we pass from Fig. 3a to b.

  16. In the rest of the paper we will use the term “welfare analysis” that is commonly used in the literature although we mainly focus on the effects that FDI in land have on the revenues of local land owners. We are fully aware that welfare implies a much broader notion than revenues as it depends on many additional drivers beyond revenues including, among other things, the environmental quality of the local ecosystem. This consideration, however, may actually reinforce some of the main results emerging from the analysis. Indeed, if external investments turn out to be non-convenient for local land owners in the present model, they would be a fortiori welfare-reducing if pollution deriving from such investments was properly taken into account.

  17. Notice that the revenues of L-agents at the stationary state in which the economy is specialized in the local sector (\(\Pi (A^{l})\)) are represented by an horizontal line (see Fig. 6a, b). Indeed, at the stationary state \(A^{l}\) there is no external sector in the economy, therefore the revenues of L-agents at \(A^{l}\) are invariant to an increase of the pollution tax or of the impact of the external sector on pollution.

References

  • Agosin MR, Machado R (2005) Foreign investment in developing countries: does it crowd in domestic investment? Oxf Dev Stud 33(2):149–162

    Article  Google Scholar 

  • Aitken BJ, Harrison AE (1999) Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. Am Econ Rev 89(3):605–618

    Article  Google Scholar 

  • Antoci A, Russu P, Ticci E (2012) Environmental externalities and immiserizing structural changes in an economy with heterogeneous agents. Ecol Econ 81:80–91

    Article  Google Scholar 

  • Antoci A, Russu P, Sordi S, Ticci E (2014) Industrialization and environmental externalities in a Solow-type model. J Econ Dyn Control 47:211–224

    Article  Google Scholar 

  • Antoci A, Borghesi S, Russu P, Ticci E (2015a) Foreign direct investments, environmental externalities and capital segmentation in a rural economy. Ecol Econ 116:341–353

    Article  Google Scholar 

  • Antoci A, Galeotti M, Iannucci G, Russu P (2015b) Structural change and inter-sectoral mobility in a two-sector economy. Chaos Solitons Fractals 79:18–29

    Article  Google Scholar 

  • Arduino S, Colombo G, Ocampo OM, Panzeri L (2012) Contamination of community potable water from land grabbing: a case study from rural Tanzania. Water Altern 5(2):344–359

    Google Scholar 

  • Arezki R, Deininger K, Selod H (2015) What drives the global ”land rush”? World Bank Econ Rev 29(2):207–233

    Article  Google Scholar 

  • Bitzer J, Görg H (2009) Foreign direct investment, competition and industry performance. World Econ 32(2):221–233

    Article  Google Scholar 

  • Borensztein E, De Gregorio J, Lee J-W (1998) How does foreign direct investment affect economic growth? J Int Econ 45(1):115–135

    Article  Google Scholar 

  • Bretschger L (2017) Climate policy and economic growth. Resour Energy Econ 49:1–15

    Article  Google Scholar 

  • Bretschger L, Pattakou A (2018) As bad as it gets: how climate damage functions affect growth and the social cost of carbon. Environ Resour Econ. https://doi.org/10.1007/s10640-018-0219-y

  • Chung W (2001) Mode, size, and location of foreign direct investments and industry markups. J Econ Behav Organ 45(2):185–211

    Article  Google Scholar 

  • Cipollina M, Giovannetti G, Pietrovito F, Pozzolo AF (2012) FDI and growth: what cross-country industry data say. World Econ 35(11):1599–1629

    Article  Google Scholar 

  • Cole MA (2004) Trade, the pollution haven hypothesis and the environmental Kuznets curve: examining the linkages. Ecol Econ 48(1):71–81

    Article  Google Scholar 

  • Cole MA, Fredriksson PG (2009) Institutionalized pollution havens. Ecol Econ 68(4):1239–1256

    Article  Google Scholar 

  • Coscieme L, Pulselli FM, Niccolucci V, Patrizi N, Sutton PC (2016) Accounting for ”land-grabbing” from a biocapacity viewpoint. Sci Total Environ 539:551–559

    Article  Google Scholar 

  • Cotula L (2012) The international political economy of the global land rush: a critical appraisal of trends, scale, geography and drivers. J Peasant Stud 39(3–4):649–680

    Article  Google Scholar 

  • Cotula L, Vermeulen S, Leonard R, Keeley J (2009) Land grab or development opportunity? Agricultural investment and international land deals in Africa. IFAD, London

    Google Scholar 

  • Damijan JP, Rojec M, Majcen B, Knell M (2013) Impact of firm heterogeneity on direct and spillover effects of FDI: micro-evidence from ten transition countries. J Comp Econ 41(3):895–922

    Article  Google Scholar 

  • Daniel S, Mittal A (2009) The great land grab: rush for world’s farmland threatens food security for the poor. Oakland Institute, Oakland

    Google Scholar 

  • Dao NT, Burghaus K, Edenhofer O (2017) Self-enforcing intergenerational social contracts for Pareto improving pollution mitigation. Environ Resour Econ 68(1):129–173

    Article  Google Scholar 

  • Deininger K, Byerlee D, Lindsay J, Norton A, Selod H, Stickler M (2011) Rising global interest in farmland: can it yield sustainable and equitable benefits?. World Bank, Washington

    Book  Google Scholar 

  • Di Corato L, Moretto M, Vergalli S (2013) Land conversion pace under uncertainty and irreversibility: too fast or too slow? J Econ 110(1):45–82

    Article  Google Scholar 

  • FAO and ITPS (2015) Status of the world’s soil resources—main report. Food and Agriculture Organization of the United Nations and Intergovernmental Technical Panel on Soils, Rome, Italy

  • FIAN (2010) Land grabbing in Kenya and Mozambique. FIAN International Secretariat, Heidelberg

    Google Scholar 

  • Giovannetti G, Ticci E (2016) Determinants of biofuel-oriented land acquisitions in Sub-Saharan Africa. Renew Sustain Energy Rev 54:678–687

    Article  Google Scholar 

  • Grether J-M, De Melo J (2003) Globalization and dirty industries: do pollution havens matter?. National Bureau of Economic Research, Washington

    Book  Google Scholar 

  • Hackett SB, Moxnes E (2015) Natural capital in integrated assessment models of climate change. Ecol Econ 116:354–361

    Article  Google Scholar 

  • Hansen H, Rand J (2006) On the causal links between FDI and growth in developing countries. World Econ 29(1):21–41

    Article  Google Scholar 

  • Haralambous S, Liversage H, Romano M (2009) The growing demand for land-risks and opportunities for smallholder farmers. IFAD, Rome

    Google Scholar 

  • Havnevik K, Haaland H (2011) Biofuel, land and environmental issues: the case of SEKAB’s biofuel plans in Tanzania. In: Matondi PB, Havnevik K, Beyene A (eds) Biofuels, land grabbing and food security in Africa. Zed Books, London

    Google Scholar 

  • He J (2006) Pollution haven hypothesis and environmental impacts of foreign direct investment: the case of industrial emission of sulfur dioxide (SO\(_2\)) in Chinese provinces. Ecol Econ 60(1):228–245

    Article  Google Scholar 

  • Herzer D, Klasen S, Lehmann F (2008) In search of FDI-led growth in developing countries: the way forward. Econ Model 25(5):793–810

    Article  Google Scholar 

  • Ikefuji M, Horii R (2012) Natural disasters in a two-sector model of endogenous growth. J Public Econ 96:784–796

    Article  Google Scholar 

  • Kemeny T (2010) Does foreign direct investment drive technological upgrading? World Dev 38(11):1543–1554

    Article  Google Scholar 

  • Levinson A, Taylor MS (2008) Unmasking the pollution haven effect*. Int Econ Rev 49(1):223–254

    Article  Google Scholar 

  • Liao C, Jung S, Brown DG, Arun A (2016) Insufficient research on land grabbing. Science 353(6295):131

    Article  Google Scholar 

  • Liu X, Parker D, Vaidya K, Wei Y (2001) The impact of foreign direct investment on labour productivity in the Chinese electronics industry. Int Bus Rev 10(4):421–439

    Article  Google Scholar 

  • López R (2010) Sustainable economic development: on the coexistence of resource-dependent and resource-impacting industries. Environ Dev Econ 15(6):687–705

    Article  Google Scholar 

  • Millimet DL, List JA (2004) The case of the missing pollution haven hypothesis. J Regul Econ 26(3):239–262

    Article  Google Scholar 

  • Nicolini M, Resmini L (2010) FDI spillovers in new EU member states. Econ Transit 18(3):487–511

    Article  Google Scholar 

  • Oya C (2013) Methodological reflections on ”land grab” databases and the ”land grab” literature ”rush”. J Peasant Stud 40(3):503–520

    Article  Google Scholar 

  • Rezai A, Foley DK, Taylor L (2012) Global warming and economic externalities. Econ Theory 49(2):329–351

    Article  Google Scholar 

  • Rulli MC, Saviori A, D’Odorico P (2013) Global land and water grabbing. Proc Natl Acad Sci 110(3):892–897

    Article  Google Scholar 

  • Saturnino M, Hall R, Scoones I, White B, Wolford W (2011) Towards a better understanding of global land grabbing: an editorial introduction. J Peasant Stud 38(2):209–216

    Article  Google Scholar 

  • Sejian V, Gaughan J, Baumgard L, Prasad C (2015) Climate change impact on livestock: adaptation and mitigation. Springer, New Delhi

    Book  Google Scholar 

  • Solow RM (1956) A contribution to the theory of economic growth. Q J Econ 70(1):65–94

    Article  Google Scholar 

  • Waldkirch A, Ofosu A (2010) Foreign presence, spillovers, and productivity: evidence from Ghana. World Dev 38(8):1114–1126

    Article  Google Scholar 

  • Williams TO, Gyampoh B, Kizito F, Namara R (2012) Water implications of large-scale land acquisitions in Ghana. Water Altern 5(2):243–265

    Google Scholar 

  • Woodhouse P (2012) Foreign agricultural land acquisition and the visibility of water resource impacts in sub-saharan africa. Water Altern 5(2):208–222

    Google Scholar 

  • World Bank (2010) World development report 2010. Development and climate change, Washington

    Book  Google Scholar 

  • Zoomers A (2010) Globalisation and the foreignisation of space: seven processes driving the current global land grab. J Peasant Stud 37(2):429–447

    Article  Google Scholar 

Download references

Acknowledgements

The authors would like to thank two anonymous referees and seminar participants at the 5th IAERE Annual Conference (Italian Association of Environmental and Resource Economists; Rome: February 16–17, 2017), at International Workshop on the Economics of Climate Change and Sustainability (Rimini: April 28–29, 2017) and at the 23rd EAERE Annual Conference (European Association of Environmental and Resource Economists; Athens: June 28–July 1, 2017) for useful comments and suggestions on a preliminary version of this work. Special thanks to Angelo Antoci for fruitful discussions that helped improve the paper. The usual disclaimer applies.

Author information

Authors and Affiliations

  1. FSR Climate, European University Institute (EUI), Via Boccaccio 121, 50133, Florence, Italy

    Simone Borghesi

  2. Department of Political and International Sciences, University of Siena, Siena, Italy

    Simone Borghesi

  3. Robert Schuman Centre for Advanced Studies, European University Institute, Florence, Italy

    Giorgia Giovannetti

  4. Department of Economics and Management, University of Florence, Florence, Italy

    Giorgia Giovannetti & Gianluca Iannucci

  5. Department of Economics and Business, University of Sassari, Sassari, Italy

    Paolo Russu

Authors
  1. Simone Borghesi
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Giorgia Giovannetti
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Gianluca Iannucci
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Paolo Russu
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Simone Borghesi.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Borghesi, S., Giovannetti, G., Iannucci, G. et al. The Dynamics of Foreign Direct Investments in Land and Pollution Accumulation. Environ Resource Econ 72, 135–154 (2019). https://doi.org/10.1007/s10640-018-0263-7

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10640-018-0263-7

Keywords

JEL Classification

Search

Navigation