Abstract
This paper provides a study of the relationship between sustainable development and foreign direct investment (FDI) from an empirical point of view in the case of the North African countries during the period from 1985 to 2005. We use the cointegration test, the FMOLS (Fully Modified Ordinary Least Squares) model and the Granger causality test to examine this relationship. According to the empirical results, we confirm the existence of a cointegration relationship between the different series studied in this paper. Based on the cointegration test we can use the error correction model. Also, to test the effect of FDI on sustainable development in the North African countries, we make an estimate by FMOLS method. We found that the foreign direct investment has a positive impact on CO2 emissions. Also, the Granger Causality test confirms the presence of a bidirectional relationship between FDI and CO2 emissions (Carbon dioxide). That is to say, the FDI can cause CO2 emissions and CO2 emissions can cause FDI based on the Granger causality.
Highlights
Regarding the relationship between foreign direct investment (FDI) and the environment, a lot of literature focuses on their potential link
To test the effect of FDI on sustainable development in the North African countries, we make an estimate by FMOLS method
We notice that there is a bidirectional relationship between FDI Granger and CO2 emissions (0.0000 < 5% and 0.0000 < 5%)
Summary
Regarding the relationship between FDI and the environment, a lot of literature focuses on their potential link. According to the study by Grossman and Krueger (1995), some studies (Selden & Song, 1995; Jones & Manuelli, 2001; Hartman & Kwon, 2005; Brock & Taylor, 2010) construct various theoretical models (e.g. model of overlapping generations) to find the possible reasons for the inverted U-shape between economic growth and pollution. In these models, they assume that individual utility is a function of the normal quality of goods and the environment, resulting in a compromise between the normal property and environmental quality to maximize the utility level when resource constraints are imposed.
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