Are Foreign Firms Good for the Environment? FDI and Protected Areas

Despite the coexistence of three trends—increased economic integration, a dramatic reduction in biodiversity, and the implementation of national policies to reduce extinction risks—we know little about how foreign investment affects biodiversity. This paper focuses on the incentives that foreign direct investment (FDI) poses on governments’ foremost strategy to protect biodiversity: the establishment of protected areas. Protected areas have expanded in most countries at rates that are not explained merely by geography or environmental reasons. We argue that FDI is associated with the expansion of protected areas through two channels. First, multinational corporations can obtain reputational benefits from host countries’ commitment to protect biodiversity. Second, protected areas impose different costs on existing and prospective FDI, and rarely entail expropriation of foreign investment. This potentially shields foreign owned firms from domestic or international competition for the use of comparable resources. Statistical analyses on a sample of 60 developed and developing countries between 1984 and 2020 strongly support our expectations. Our findings shed new light on globalization’s non-economic implications and add to our understanding about how international factors influence the provision of public goods.