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Foreign direct investments, environmental externalities and capital segmentation in a rural economy

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  • Antoci, Angelo
  • Borghesi, Simone
  • Russu, Paolo
  • Ticci, Elisa

Abstract

This paper examines the possible effects of external investment inflows on the development of local rural economies, taking into account two recurrent features of many developing countries: capital market segmentation and environmental externalities. To investigate this issue, we examine a model with two sectors: the “local sector” and the “external sector”. Physical capital accumulation in the latter sector is driven by foreign direct investments, while in the former sector it follows a Solow-type accumulation mechanism. We assume that the production activity of the external sector damages the environment while the local sector relies on natural resources. In this context, we give the conditions under which capital inflows can promote diversification of host economy while improving welfare of local populations. If these conditions are not satisfied, external investments fuel a welfare reducing process (for the local community) and a self-enforcing growth of the external sector at the expense of the local one.

Suggested Citation

  • Antoci, Angelo & Borghesi, Simone & Russu, Paolo & Ticci, Elisa, 2015. "Foreign direct investments, environmental externalities and capital segmentation in a rural economy," Ecological Economics, Elsevier, vol. 116(C), pages 341-353.
    • Handle: RePEc:eee:ecolec:v:116:y:2015:i:c:p:341-353
    DOI: 10.1016/j.ecolecon.2015.04.029
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    More about this item

    Keywords

    Two-sector model; Foreign direct investments; Environmental negative externalities; Self-protection choices; Structural change;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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