THE TWO-WAY LINKAGE BETWEEN FOREIGN DIRECT INVESTMENT AND ENVIRONMENTAL POLLUTION IN VIETNAM - FROM SECTORAL PERSPECTIVES

AbstractTwo-way linkage between foreign direct investment (FDI) and environmental pollution isa topic that has attracted a great deal of attention of economists. Nevertheless, there arefew quantitative studies which indentify the relationship between FDI and environmentalpollution using sectoral data. Utilizing that kind of data with the General Methods ofMoments (GMM) regression method, this paper affirms the existence of two-way linkagebetween FDI and environmental pollution. Specifically, FDI is found to cause an increasein the level of pollution, which is measured by the emission of greenhouse gases (GHG) foreach economic sector, while the higher degree of pollution also boosts up the amount of FDIflows into Vietnam. Besides, the paper finds that: (i) There is a Kuznets Curve’s invertedU-shaped relationship between pollution level and economic growth in general but not forthe sector of energy; (ii) Energy sector experiences a rise in the degree of pollution whileattracting a large amount of FDI;(iii) Within the energy sector, the sub-sector of production& distribution of electricity, gas and water has received a limited value of FDI. Based onthese results, some policy recommendations will be made for Vietnamese government toattract more FDI but still reduce pollution levels..Key words: Foreign Direct Investment (FDI), Environmental pollution, Economic sector.Date of submission: 22rd December 2015 – Date of approval: 10th February 2016.