Globalization and the environmental impact of sectoral FDI

We analyze the environmental impact of capital inflows and investigate the halo effect (FDI improves the environment). We control for the type of FDI inflows, the EKC (Environmental Kuznets Curve) effect and the country income level, and find (i) a differential industry effect: FDI flows into manufacturing increase pollution (negative halo effect), while those flowing into services support the halo effect hypothesis; (ii) an income inequality effect: FDI flowing into low- and middle-income countries degrades the environment, while flows to high-income countries benefit the environment and support a halo effect; (iii) support for the EKC effect if capital flows into agriculture and services in poorer countries and into mining and manufacturing in wealthier economies. We show that studies relying only on firm-level or aggregate data miss the sectoral spillovers, and thus may lead to misleading conclusions.