Do FDI inflows bring both capital and CO2 emissions? Evidence from non-parametric modelling for the G7 countries

Abstract

Foreign direct investment profoundly influences environmental conditions while promoting economic growth. This study examines the effects of FDI on CO2 emissions across the G7 countries from 1971 to 2020. Utilizing panel data, we employ a local linear dummy variable estimation method to analyze the non-linear and time-varying relationships between FDI and CO2 emissions. Our findings reveal a negative correlation between FDI and CO2 emissions during the period 1971–1995. In contrast, from 2000 to 2015, a significant positive correlation is observed. After 2015, no significant relationship is detected. Furthermore, we investigate the moderating effect of trade openness, urbanization level, and energy consumption to gain a deeper understanding of how the relationship between FDI and CO2 emissions is influenced under different national contexts. These findings underscore the dynamic nature of the relationship between FDI and CO2 emissions, offering significant implications for the advancement of a low-carbon economy.