Foreign Investment and Environment in Developing Countries: A Perspective from Agricultural Subsidy with Foreign Capital Taxation

It is often difficult to improve the environment when attracting foreign investment in developing countries. Therefore, this paper develops a policy concept of subsidizing agriculture financed by foreign-capital income tax in developing countries, and explores whether it can improve the environment while increasing the inflow of foreign capital. To this end, we propose a general-equilibrium model comprising the characteristics of developing countries and, account for the economic and environmental effects of this policy by using that model. It shows that both wage subsidy and interest subsidy, whether in the long run or in the short run, improve the environment and promote the welfare conditionally. Most importantly, in the long run, the inflow of foreign capital can be increased under certain conditions.