Does foreign direct investment matter for environmental innovation in African economies?

Abstract

This study investigates the role of foreign direct investment (FDI) in environmental innovation in Africa during 1990–2019. It utilizes the endogenous growth theory to specify an innovation production function, estimated using the seemingly unrelated regression (SURE) method. The study employs four indicators of environmental innovation and also controls for the influence of resource abundance. Key findings from the study show evidence that FDI inflow enhances environmental innovation practices by improving resource efficiency outcomes. In particular, FDI is found to reduce greenhouse gas emission intensity of output and carbon intensity of energy. Further, the effect of FDI on resource utilization and energy productivity is insignificant. Estimates confirm the learning and imitation, and demonstration effects of FDI on resource utilization, though the formal effect is detrimental. The labour market effect is revealed to promote resource efficiency, while resource abundance plays negligible role in environmental innovation in all models. Policy implications are derived.