Foreign Direct Investment and the Pollution Haven Hypothesis in Indonesia

Abstract

This paper investigates the validity of the pollution haven hypothesis in the context of Foreign Direct Investment (FDI) in Indonesia by determining the correlations between carbon emission and foreign direct investment, gross domestic product, and population size between 1975 and 2009 in that country. Statistical results from Spearman‟s correlation analysis show that CO2 emission has a statistically significant negative relationship with real Gross Domestic Product (GDP), and a statistically significant positive relationship with population size in the Indonesian economy between 1975 and 2009. However, there is a weak and insignificant relationship between CO2 emission and real FDI during this period which indicates weak support for the pollution haven hypothesis because FDI does not appear to be as strong a contributing factor to CO2 emission as the activities of the population in Indonesia.