The impact of the Compact with Africa initiative on foreign direct investments and environmental pollution

Abstract

PurposeThis study is motivated by the Compact with Africa (CWA) initiative to promote foreign direct investment (FDI) in Africa. However, FDI is argued to be one of the primary causes of environmental pollution (CO2 emissions). In that regard, this study estimates the impact of the CWA initiative on FDI and environmental pollution.Design/methodology/approachThe study utilized the difference-in-difference (DID) and triple difference (DDD) estimation strategies to examine the causal impact of the CWA initiative on FDI and environmental pollution from 2005 to 2019. The study selected nine CWA countries and nine non-CWA countries as treatment and control samples.FindingsThe authors found that the CWA initiative positively promotes FDI in the participant countries compared to non-participant countries. The CWA initiative also promoted environmental pollution in the CWA countries compared to non-CWA countries. Furthermore, the DDD estimates show that the effect of the CWA initiative on environmental pollution is through FDI.Practical implicationsThe authors recommend policies to attract environmentally friendly FDI for both Compact and non-Compact economies.Originality/valueThe study is the first to provide empirical evidence on the CWA initiative on FDI and environmental pollution in Africa. The study used a quasi-experimental method on the relationship between FDI and environmental pollution in Africa.