Measuring the Effect of Foreign Direct Investment on CO2 Emissions in Laos

Abstract

This paper aims to explore the determinants of CO2 emissions in Laos by accounting for the significant role played by foreign direct investment (FDI) in influencing CO2 emissions during the period 1990–2017. We apply a Johansen co-integration testing approach to investigate the presence of co-integration, and the empirical findings underscore the presence of a long-run co-integration relationship between CO2 emissions, FDI, per capita GDP, and industrial structure. We also employ an error-correcting model to examine the short-term dynamic effect of FDI on CO2 emissions. The empirical results show that FDI has a significant short-term dynamic effect on changes in CO2 emissions, indicating that the relationship between FDI and CO2 emissions is an inverted U-shaped curve. This is a validation of the EKC. Changes of FDI, per capita GDP, and industrial structure increase CO2 emissions. Based on the analysis results, this paper puts forward policy suggestions emphasizing the need for both Laotian policymakers and Chinese investors to improve eco-environmental quality.