The Causal Link between FDI, FPI and Carbon Emissions : Evidence from South Africa

This study uses the Autoregressive Distributed Lag model to examine the relationship between foreign direct investment (FDI), foreign portfolio investment (FPI), per capita GDP, and per capita carbon emissions in South Africa. It finds evidence of a positive relationship between carbon emissions and the investment flows of both FPI and FDI as well as GDP. This suggests that an increase in FPI, FDI and GDP per capita will lead to more carbon emissions per capita. The positive association can be explained by the fact that an inflow of funds augments industrializing companies' capital, enabling them to increase production. The evidence confirms that FDI-led investment is directed towards energy-intensive sectors. The positive relationship between carbon emissions and portfolio investment seems to go against the global call for clean energy and green investment where investors are expected to consider a country's policies on climate change and carbon emissions to the effect that they invest in the shares and bonds of entities that promote reduction of such emissions. Similarly, the positive association between FDI and carbon emissions suggests that, as an emerging market, South Africa has emissions that are primarily due to its heavy reliance on coal for electricity production. This could be due to weak environmental regulations intended to attract international investment. In formulating strategies to attract investment for economic growth, South Africa should ensure environmental issues are put at the forefront of the development agenda. This means that heavy industry funded by foreign investment should be accompanied by corresponding investment in renewable sources of energy.