Environmental risk, FDI and tax reforms: why we must worry

Abstract

Purpose

In this paper, we use empirical models to examine the main channel through which FDI escalates environmental risk. We explore whether countries with “weak” or better still low tax rate attract “dirty” FDI to deteriorate their environment

Design/methodology/approach

The analysis uses a 40-year panel to show that foreign direct investment (FDI) and tax policy matter in accounting for cross-country environmental risk.

Findings

Our sample finds support that the tax channel is the main medium through which FDI worsens environmental risk. By discomposing tax policy into low and high regimes, we report that countries that deliberately reform tax policy to bait FDI have higher environmental risk.

Social implications

A useful lesson from here is that using tax policy to lure FDI amounts to shortchanging capital risk for environmental risk.

Originality/value

The paper is unique because it identifies tax policy as a channel through which FDI affects the environment in Africa. Other studies overly simplifies the relationship between FDI and its impact on the environment, and it makes it difficult and ambiguous in offering specific policy direction.

Citation

Boachie Yiadom, E. and Mensah, L. (2021), "Environmental risk, FDI and tax reforms: why we must worry", African Journal of Economic and Management Studies, Vol. 12 No. 2, pp. 269-284. https://doi.org/10.1108/AJEMS-08-2020-0399