The Role of Carbon Emissions on Inward Foreign Direct Investment: A Nonlinear Dynamic Panel Data Analysis

Adem Gök, Ayesha Ashraf () and Elzbieta Jasinska
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Ayesha Ashraf: Department of Economics, The Women University, Multan 60000, Pakistan
Elzbieta Jasinska: Department of Operations Research & Business Intelligence, Wroclaw University of Science & Technology, 50-370 Wroclaw, Poland

Sustainability, 2024, vol. 16, issue 13, 1-16

Abstract: An increase in carbon emissions (CO 2 ) may increase inward foreign direct investment (FDI) in developing countries since they are seen as pollution havens because of lax environmental regulations ( pollution haven hypothesis ). Developed countries may also attract FDI since stringent environment regulations in these countries working to reduce emissions might be more attractive to foreign investors concerned with their repute from a green perspective. A rise in CO 2 emissions in developed countries therefore deters inward FDI ( green haven hypothesis ). The existing empirical studies investigate the empirical validity of these hypotheses by focusing on the impacts of environmental policies and regulations on FDI and have yet to produce conclusive results. We examined the effect of CO 2 emissions on FDI and provide a more accurate and novel way of investigating the empirical validity of the pollution haven hypothesis against the green haven hypothesis . Specifically, we examined the non-linear effects of CO 2 emissions on inward FDI in a sample of 124 countries over the period 1997–2022. The results indicate that CO 2 emissions have an inverted-U-shaped relationship with FDI, confirming our hypotheses that higher CO 2 emissions in countries with lax environmental standards attract FDI while environmental degradation in countries with stringent environmental standards deter FDI.

Keywords: CO 2 emissions; FDI inflows; green haven; pollution haven; system GMM (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2024
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