Revisiting the Foreign Direct Investment-CO2 Emissions Nexus within the N-EKC Framework: Evidence from South Asian Countries

Abstract

This study explores the dynamic connection between foreign direct investment (FDI), economic growth and CO2 emissions, a topic that has sparked considerable debate in extant literature. The study aims to shed light on these interactions within the context of South Asian countries. Uniquely, it expands the traditional Environmental Kuznet Curve (EKC) model to a cubic specification, enabling an examination of the N-shaped relationships between pollution and GDP, as well as pollution and FDI. To this end, annual frequency data were employed while leveraging on the augmented mean group (AMG) panel estimation method.Empirical findings reveal both inverted U-shaped and N-shaped relationships, with the latter prevailing over the former in the long run. This confirms the pollution haven hypothesis, indicating that the environmental cost of FDI decreases as GDP increases. The study also discovers a substitutive relationship between FDI and GDP in terms of environmental impact, alongside a similar substitutive link between GDP and energy consumption. This indicates that the adoption of renewable energy, coupled with economic growth, leads to a reduction in carbon emissions. These insights offer crucial implications for enhancing environmental sustainability in South Asia. The outcomes of the pollution haven hypothesis calls for caution on foreign direct inflow especially on dirty growth which comes with trade-off with environmental quality.Thus, South Asian governments official should proactively direct foreign direct investment into green initiatives. These initiatives including renewable energy infrastructure that will foster clean growth and environmental quality by extension.

Keywords

• Environmental sustainability
• carbon reduction
• foreign direct investment
• renewable energy
• economic growth
• South Asia