Empirical evidence shows the impact of FDI on water pollution

Until the late 1990s’, ‘development’ encompassed economic and social well-being of a country i.e. rise in GDP, generation of employment opportunities and promoting trade balance. The millennium development goals and sustainable development goals set by the United Nation Development Programme (UNDP) is to promote environmental, social and economic sustainability. Environmental degradation from water pollution is being witnessed at an alarming rate owing majorly to economic activities.

A previous article discussed the relationship between foreign direct investment (FDI) inflows and air pollution. This article reviews notable studies conducted in the past linking FDI inflows to water pollution across the world. With an increase in urbanization and the formation of new cities, the consumption of groundwater and generation of wastewater is increasing. In India, for instance, 70-80% of water supplied to the domestic area gets converted into sewage water. Furthermore, industries also generate enormous amounts of effluents of which only 60% gets treated. Furthermore, the cost of establishing and managing a conventional wastewater plant is high. Therefore, untreated effluents are directly discharged into different water bodies of India (Kaur, Wani, Singh & Lal, 2012). This leads to contamination of groundwater and thus increases the levels of water pollution in the country.

Water pollution in India

A report of ENVIS, Central pollution Control Board (CPCB, 2012) classified 64 types of industries as ‘red category’ industries because they had the highest amount of emission or discharge of effluents in water bodies. Manufacturing, power-generating, food-processing, and mining and construction industries are the main industries which contribute to significant discharge of industrial effluents (Gambhir et al, 2012). These industries discharge high amounts of radioactive materials, catalyst, organic by-products, metals, and other nutrients. Although water bodies have self-purification properties, due to discharge of toxic untreated industrial and sewage particles, the pollutants get either dissolved in water or settle on the bed of water bodies (Reza, 2010). Thus, the physical and chemical property of the water gets affected, making it unsuitable for further usage.

For example, Murty & Kumar, (2011) stated that according to CPCB 2008 dataset, only 32% of the wastewater generated by Class-I cities and 8% of the Class-II towns in India is treated. Brahmani River is majorly polluted by thermal power plant discharge of effluents (Reza, 2010). In Surat, small scale industries are the major contributor to water pollution. Furthermore, large scale industries like Reliance, Essar Power, Adani, KRIBHCO, and other oil and natural gas corporations are also in the red category industries (Bansal, 2018).

Conflicting findings on the impact of FDI inflows on water pollution

Foreign investment plays a key role in the economic development of a country. A previous article discussed the relevance of FDI inflows for the economic growth of a country. However empirical evidence on the role of FDI in water pollution is largely divided. With the derivation of sustainable development, focus on the environment, protection-related activities has increased. This is leading to positive changes as well. For instance, a study based on China showed that an increase in FDI tends to enhance the protection of the environment. FDI inflows enable acquisition of better technology. In case of water pollution, FDI inflows have helped in improving the water utilization ability and due to technological advancements, it acts as a source of implementing sewage treatment plants (Ding, Tang, & He, 2019; Zhang, Qu, Zhang, Li, & Miao, 2019).

A study by the University of Ghana showed that FDI Inflows are invested in water infrastructure development programmes and capacity enhancement of treatment plants in order to restore the quality of water (Darlington & Aheto, 2014). In case of Shanghai too, the FDI inflows were used for waste-water treatment. In India, the FDI inflows tend to have technological spillover effect which helps in improving the sewage water treatment by reducing the level of coliform, or conductivity. Hence, these steps have contributed to environmental protection and are along with the existence of strict government regulations (Ding et al., 2019; UNCTAD, 2004).

On the contrary, the study of (Zomorrodi & Zhou, 2017) showed different findings in context of China. The author studied the impact of FDI inflows on water and air pollution by dividing the dataset into four provinces: East, West, South and North. Sulphur and wastewater emissions were analysed alongside FDI inflows. The findings revealed that with every 1% increase in FDI inflows, wastewater discharge increased by 0.1192%, thus establishing a negative effect of FDI inflows on the condition of water in China.

Similar findings were deduced by (Jorgenson, 2007) who studied the impact of FDI inflows on water and air pollution in the case of 37 countries across the world. Panel data fixed effects model was applied by the author with the main dependent variable being biochemical oxygen demand and independent variables being FDI inflows in different sectors. The findings of the study confirmed the presence of the pollution haven hypothesis, i.e.

Developed countries tend to setup up manufacturing units in developing countries with lax environmental regulations.

Thus, in conclusion, the author states that an increase in FDI inflows leads to an increase in water pollution.

The need for empirical analysis in case of India

It can be seen from the review of different studies that there is no consensus on the impact of FDI inflows on water pollution of a country. While some authors confirm the presence of the pollution haven hypothesis, particularly in the case of China, other authors dismiss it and call FDI an important contributor to environmental conservation. In the case of India, there is presently no study empirically analyzing this effect. Therefore, such a study would immensely contribute towards the existing body of knowledge on the subject of environmental protection and the role of economic policies in it.


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Riya Jain
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