How does foreign direct investment affect CO2 emissions in emerging countries?New findings from a nonlinear panel analysis

Abstract

Despite their success in attracting foreign direct investment (FDI), emerging countries are suffering from increasing carbon pollution. The identification of the impact of FDI on CO2 emissions plays a prominent role in utilizing FDI to propel cleaner production and reduce pollutant emissions. Numerous studies have been devoted to clarifying the direct impact of FDI on CO2 emissions. However, little work has focused on the spillover effect of FDI on CO2 emissions through economic growth. To address this gap in the literature, this paper introduces an extension of the panel smooth transition regression (PSTR) model with nonlinear and dynamic features to simultaneously investigate the direct and spillover influences at work in FDI inflows and CO2 discharges. The results manifest that FDI can directly result in an ascent in CO2 concentrations. In contrast, the results of spillover effect through economic growth suggest that FDI can decrease CO2 concentrations. With the increase in FDI inflows, the total effect of FDI on CO2 leakages is smoothly shifted from positive to negative, thereby corroborating the pollution haven and pollution halo hypotheses. Moreover, the connection between inward FDI and CO2 emissions exhibits two transition regimes, and the transition is realized when FDI reaches 24.340. The results of a nonlinear marginal analysis show that the influence of FDI on CO2 emissions has significant regional heterogeneity and reveals “W+V-shaped” temporal characteristics. The findings set out in this study provide new evidence for the evaluation of the pollution risk caused by FDI inflows and insights into the choice of a sustainable development path in emerging markets.