Nonlinear effect of FDI, economic growth, and industrialization on environmental quality

Abstract

PurposeThe purpose of this paper is to analyze the long-run as well as short-run nonlinear effect of foreign direct investment (FDI), economic growth (EG) and industrialization on environmental degradation (carbon dioxide (CO2) emissions) in Pakistan.Design/methodology/approachThe study applies a nonlinear autoregressive distributive lag methodology to examine the long-run and short-run relationship among the variables. FDI, EG and industrialization are decomposed into positive and negative variations to examine the nonlinear relationship with CO2emissions. Granger causality test is used to examine the direction of causality among the variables. The study uses annual time-series data of Pakistan from 1975 to 2016.FindingsAn increase in FDI has a positive and significant effect on CO2emissions in the long run, while a decrease in FDI has a negative and insignificant effect on CO2emissions. An increase in EG has a positive and significant effect, while a decrease in EG has a negative and insignificant effect on CO2emissions in the long run. An increase in industrialization has a positive and significant effect on CO2emissions, while a decrease in industrialization has a negative and insignificant effect on CO2emissions. Unidirectional causality flows from CO2emissions to a positive partial sum of FDI, EG, industrialization and a negative partial sum of EG in the short run.Practical implicationsThe government has to establish the environmental regulation for industrial sectors. Research and development centers are required at government and private levels to control pollution through new technologies. Regulations and restrictions are required on the foreign investor to adopt friendly environmental policies.Originality/valueThis study contributes to the existing literature by analyzing the nonlinear effects of FDI, industrialization and EG on environmental pollution in Pakistan. The main significance of this investigation is to provide the essential evidence, information and better understanding to key stakeholders of the environment.