FDI and environmental degradation: the role of political institutions in South Asian countries

Abstract

This study examines the impact of foreign direct investment (FDI) on environmental degradation by keeping in view the role of institutional quality (IQ) in the South Asian region. Second-generational unit root test is used to address the issue of cross-sectional dependency. Mixed order of integration enabled us to use panel autoregressive distributed lag (ARDL) method to investigate short-run and long-run association. Moreover, this study also employs Granger causality test to explore causalities among the selected variables. Empirical results reveal that FDI has a positive and statistically significant effect on environmental degradation. Institutional quality is measured as rule of law has insignificant impact on ecological footprint both in short run as well as long run. However, government stability decreases environmental degradation while corruption enhances environmental hazards tremendously. This study also supports environmental Kuznets curve (EKC) for the South Asian countries. This study emphasized the role of political institutions in environmental degradation. South Asian countries must focus on the implementation of environmental laws and regulations by improving the quality of institutions to achieve the goal of sustainable development.