Foreign direct investment and green GDP: the thresholds of financial development for economic policies

Ngoc Toan Bui and Thu-Trang Thi Doan

Cogent Economics & Finance, 2024, vol. 12, issue 1, 2437011

Abstract: This study aims to examine the impact of foreign direct investment (FDI) on green GDP while analyzing the role of financial development thresholds in moderating the relationship in the ASEAN-6 countries. These are six leading countries in the ASEAN region. The study employs the Generalized Method of Moments (GMM) regression to estimate the models, in combination with Bayesian regression to check the results’ robustness. The findings indicate that FDI plays an important role in fostering green GDP in the countries. Furthermore, the financial development thresholds can moderate this impact. Specifically, the estimation results used threshold effects reveal that the threshold value for the financial market index is 0.38, and for the financial institution index, it is 0.68, which both represent financial development. The GMM and Bayesian regression results consistently show that the positive impact of FDI on green GDP becomes evident only when financial development surpasses these threshold values. Notably, financial institutions have shown themselves to be more effective than financial markets in amplifying this impact. These findings provide a reliable foundation for the ASEAN-6 countries to develop appropriate economic policies to promote green GDP.FDI is a critical source of capital for many countries globally, particularly for those lacking sufficient funds to foster economic growth while safeguarding the environment. However, most FDI-receiving countries are still struggling to enhance their ability to attract and absorb this capital. To address this issue, this study aims to analyze the impact of FDI on green GDP in the ASEAN-6 countries and also to clarify the moderating role of financial development thresholds in this impact. The first key finding reveals that FDI has a positive impact on green GDP in the ASEAN-6 countries, affirming the importance of FDI in promoting green GDP there. Second, the results reveal the existence of threshold values for both the financial market development and financial institution development indices. The positive effect of FDI on green GDP only becomes evident when financial development exceeds these values. Notably, financial institutions show a more effective role than financial markets in amplifying the impact of FDI on green GDP. These findings suggest that the ASEAN-6 countries should make more efforts to attract FDI while simultaneously improving their domestic financial systems to enhance their capacity to absorb this capital. The findings also provide valuable empirical evidence for researchers in this field. Additionally, the study offers meaningful insights for policymakers in the ASEAN-6 countries to identify suitable economic policies aimed at improving FDI absorption capacity, thereby boosting green GDP growth.

Date: 2024
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DOI: 10.1080/23322039.2024.2437011

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