Inflow of Foreign Capital and Environmental Pollution in the Presence of an Informal Sector : A Theoretical Analysis

This paper attempts to examine the implications of foreign capital inflow, which leads to transfer of environmentally sound technology (EST) to the formal manufacturing sector, on the levels of domestic pollution and national income in the presence of an informal sector. The informal sector produces a non-traded intermediary for the formal sector. Owing to environmental regulations the formal manufacturing sector abates the cost of pollution generated from the emission of pollutants in both the formal and the informal manufacturing sectors. It has been found that under some reasonable conditions an inflow of foreign capital raises total domestic pollution and raises national income