Nexus between environmental quality, institutional quality and trade openness through the channel of FDI: an application of common correlated effects estimation (CCEE), NARDL, and asymmetry causality.

Abstract

Determinants of trade openness are available in the literature; however, no substantial evidence available for the nexus between environmental quality, institutional quality, and trade openness with the presence of FDI as a mediating factor. With this study, we tried to figure out the answer to the question, i.e., whether the relationship between EQ, IQ, and TO is symmetric or asymmetric, provided that FDI is a mediating factor by performing ARDL, CS-ARDL, and nonlinear ARDL for 1982-2019. Furthermore, directional causality also evaluates by following the non-Granger causality test with symmetry and asymmetry of EQ, IQ, and FDI in respective equations. Study findings with ARDL and CS-ARDL document that positive outcomes are running from EQ, IQ, and FDI to trade openness, especially in the long run. Furthermore, asymmetric estimation establishes asymmetry shocks in EQ, IQ, and FDI which are positively linked with trade openness, especially in the long run. Moreover, the Wald test results ascertain the presence of asymmetry both in the long run and short run. The directional casualty with symmetry effects of EQ, IQ, and FDI disclosure feedback hypothesis explains trade openness's causal effects. Besides, causality test with asymmetry divulges feedback hypothesis available between EQ and trade openness, i.e., [EQ-TO: EQ+TO] and IQ and trade openness [IQ-TO: IQ+TO], on the other hand, unidirectional casualty running from positive shocks in foreign direct investment to trade openness [FDI+TO].