The role of environmental sustainability, foreign direct investment and trade openness in economic growth: with emphasis on the causal linkage

Abstract

Foreign direct investment (FDI) and environmental quality contributes very significantly to all parts of the world, especially developing countries. These two factors have been so important that are known as the engine of economic growth and progression. This paper aimed to examine the association between environmental sustainability index, economic growth, and FDI in selected developing countries. Estimation of long-run coefficients is carried out by using Dynamic Ordinary Least Square (DOLS) and Fully Modified Ordinary Least Square (FMOLS), and the estimation of short-term coefficients and causality relationships using Pooled Mean Group (PMG) method in panel data for intervals 2000-2020. The outcomes of long-term estimates of variables indicate that each variable is statistically significant; so that, FDI has the greatest effect on the economic growth. The environmental quality index had a significantly positive impact on the economic growth; so that, after FDI variable, it significantly affected economic growth in selected developing countries. There is a significantly positive relationship between FDI and quality of environment and economic growth in short term. In the equation of environmental quality index, economic growth, FDI and trade openness show a significantly negative impact on quality of environment in the short term. Generally, as it was observed from the short-term and long-term relationships, the association between economic growth and quality of environment is a two-way causality relationship.

Keywords

• environmental sustainability index
• trade openness
• fdi
• economic growth