Examining foreign direct investment and environmental pollution linkage in Asia

Abstract

This study investigated the causal linkage between environmental pollution by carbon dioxide (CO2) emissions and net foreign direct investment (FDI), along with some other variables, namely economic growth by real per capita income and trade openness, using balanced annual data of 17 countries from Asia for the period from 1980 to 2014. Panel cointegration tests confirm the long-run association among the variables. After checking the panel data for stationarity properties, the method panel fully modified ordinary least squares (FMOLS) is implemented. The FMOLS estimates on CO2 emission model reveal that inward FDI has a significantly positive impact on environmental pollution, supporting the pollution haven hypothesis (PHH). Likewise, FDI model results imply that CO2 emissions represent environmental pollution; economic growth and trade openness are the pivotal determinants of FDI. Panel causality results suggest bidirectional linkages between CO2 emissions and inward FDI. Empirical findings suggest that economic policy reforms are required to channelise foreign capital inflows to a more environmentally healthy direction. The governments of Asian countries should chalk out policies on FDI inflows and the environment in order to achieve sustainable economic growth and development.