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Nonlinear relationships between Foreign Direct Investment decisions and environmental degradation in high- and middle-income countries

Author

Listed:
  • Rafaela Vital Caetano

    (University of Beira Interior
    University of Beira Interior)

  • António Cardoso Marques

    (University of Beira Interior
    University of Beira Interior)

Abstract

Globalization, although beneficial in spreading knowledge and improving green technologies worldwide, is also considered one of the main drivers of global warming. Recent world events, such as the pandemic, with all its economic and social consequences, have exposed the external dependence of many countries, particularly the reliance of many developing countries on foreign investment. Although it contributes to economic growth, Foreign Direct Investment may also be harmful to the environment. Hence, this study analyses the impact of Foreign Direct Investment on emissions of Greenhouse Gases, Carbon Dioxide, Nitrous Oxide and Particulate Matter 2.5. A Panel Autoregressive Distributed Lag model was conducted for a group of 25 high-income and 10 middle-income countries from 1995 to 2019, allowing the analysis of short- and long-run impacts. Given the likelihood of nonlinear impacts, a Nonlinear Panel Autoregressive Distributed Lag model was also conducted to provide a more detailed understanding of the effects of expansion or contraction on the variables, and also to analyse short- and long-run impacts. The main findings suggest that electrification and energy transition away from fossil fuels to renewable energy may be crucial to limiting the polluting effect of Gross Fixed Capital Formation, Trade Openness and Foreign Direct Investment. However, it would be a mistake to simply reduce these three factors as the results reveal that it also contributes to increase pollution. Foreign Direct Investment and Trade Openness reduce environmental degradation in high-income countries and increase it in middle-income countries, except for Nitrous Oxide emissions.

Suggested Citation

  • Rafaela Vital Caetano & António Cardoso Marques, 2024. "Nonlinear relationships between Foreign Direct Investment decisions and environmental degradation in high- and middle-income countries," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 51(1), pages 135-188, March.
  • Handle: RePEc:spr:epolin:v:51:y:2024:i:1:d:10.1007_s40812-023-00282-0
    DOI: 10.1007/s40812-023-00282-0
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    More about this item

    Keywords

    Asymmetric impact; Environmental pollution; Foreign Direct Investment; Nonlinear ARDL; Pollution Haven Hypothesis;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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