Foreign direct investments in the forest sector: implications for sustainable forest management in developed and developing countries

Foreign direct investments (FDI) have increased rapidly in forest industry since the 1990s. In order to anticipate the location of production, and thus the impact on global forest resources, we need to understand the determinants of foreign direct investments. The aim of this paper is to examine the causal relationships between inflow foreign direct investments in the forest sector and host country-specific factors affecting the geographical aspects of the FDI. Utilizing data for developed (the US and Canada) and for developing (Brazil and Chile) countries in the Americas, panel Granger-causality testing was used to analyze these relationships. The results indicate that there is no causal relationship between FDI and GDP or between FDI and wage level in the developed countries. In the developing countries, however, there is bi-directional causality between FDI and GDP, suggesting that policies supporting openness, at least sectorally, could have positive economic impact in the host country. The results further indicate that in developed countries the roundwood supply does not Granger-cause the foreign direct investment but that the FDI does cause the roundwood supply, indicating that investments could potentially encourage policy making in the developed countries that allows unsustainable use of the forests. The causal relationship in the developing countries was from roundwood supply to FDI. Therefore, active policies encouraging forestry operations could attract foreign direct investments to the forest sector in these countries. In order to encourage sustainable forest management, it would be important to have forest policies aiming at sustainable use of forests in place, as well as means to enforce these policies.