Foreign direct investment, bad governance and forest resources degradation: evidence in Sub-Saharan Africa

This paper examines foreign direct investment's (FDI) effects on forest area change conditional on governance in Sub-Saharan Africa (SSA). This research is motivated by an apparent lack of attention on the unrestrained extraction of non-renewable natural resources in developing countries by multinational corporations in the empirical literature of pollution haven hypothesis. Using a panel data set of 38 SSA countries, over the period 1996-2011, this study reveals that FDI has a negative and significant net effect on forest area. The magnitude of this effect depends on the level of governance in these countries, despite the positive impact of governance indicators on forest preservation. This means that multinational corporations activities are associated with a lost of forest cover due to the low level of governance in SSA. Moreover, among the selected governance indicators, the findings suggest that in a regime where the rule of law and corruption control are not enforced, FDI leads to more forest degradation. More precisely, a marginal increase in the FDI stock (resp. flow) conditional on the average levels of rule of law and corruption control lead to a reduction of 6.63% (resp. 9.77%) and 5.74% (resp. 8.86%) respectively of forest cover per capita.