Financial Development, Trade Openness, and Foreign Direct Investment: A Battle Between the Measures of Environmental Sustainability

Weidong Huo,Muhammad Zulfiqar,Shahida Parveen,Umar Kibria,Muhammad Rizwan Ullah

doi:10.3389/fenvs.2022.851290

Abstract

Deterioration in the environmental quality is a major threat to the sustainable development of an economy as it results in serious economic problems and the researchers are conscious about the environment sustainability. They have identified several factors including financial development, inflow of foreign aid, and openness of trade to promote environmental sustainability. Unfortunately, their findings remain inconclusive as they have imperfectly measured environmental sustainability. This study, thus, aims to contribute to the ongoing debate of environmental sustainability by testing the role of financial development, trade openness, and foreign direct investment (FDI) in promoting environmental sustainability by using adjusted net savings as a measure of environmental sustainability. To do this, the study collects data from 1996 to 2019. The study uses financial development, trade openness, and FDI as predictors and environmental sustainability as an outcome variable. The study applies Auto Regressive Distributive Lag (ARDL) methodology to analyze the impact. The findings show positive contributions of financial development, trade openness, and foreign direct investment in promoting environment sustainability. We suggest encouraging trade through lower-taxation programs and increasing competition in the financial markets through privatization and domestic and international liberalization to stimulate environmental sustainability. We also recommend imposing high taxes and penalties on such activities that damage the quality of the environment.

Highlights

Over the past 3 decades, different researchers and policy makers have shown their great interest in promoting economic growth, and the achievement of economic growth remains a prime concern of both developed and developing economies (Ahmed et al, 2020; Ahmed et al, 2021; Meirun et al, 2021; Zhang et al, 2021)
Deterioration in environmental quality (EQ) is a significant challenge to an economy’s sustainable growth as it results in substantial economic difficulties such as poverty, inequality, and food scarcity
The researchers discovered a variety of characteristics that contribute to environment sustainability (ES), including financial development, foreign assistance inflow, and trade openness

Summary

Introduction

Over the past 3 decades, different researchers and policy makers have shown their great interest in promoting economic growth, and the achievement of economic growth remains a prime concern of both developed and developing economies (Ahmed et al, 2020; Ahmed et al, 2021; Meirun et al, 2021; Zhang et al, 2021). Deterioration in EQ negatively impacts production systems (Elahi et al, 2017; Elahi et al, 2019c; Zhao et al, 2020; Zheng et al, 2020; Peng et al, 2022) This deterioration in EQ is a major warning to an economy’s sustainable development (Khan et al, 2021), as it falls out with serious economic consequences like poverty, inequality, food-shortage, etc. Researchers endeavored to identify different factors to promote ES To some extent they have become successful in exploring the factors having substantial contributions in the reduction of carbon emissions. Regrettably, their findings remain inconclusive regarding ES. This assumption is not applicable practically, as ES and environmental degradation (ED) are two different dimensions of EQ, a controversial point widely discussed in the literature (Ganda, 2019; Ahmed et al, 2021)

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