The Relationship Between Foreign Direct Investment and CO2 Emissions Across a Panel of Countries

Abstract

This paper analyses the relationship between foreign direct investment inflows and pollution emissions for 139 countries during the period of 1970–2015 and the countries are classified into four groups regarding to the World Bank income ranking. The main motivation of this study is to analyse, whether the causal relationship differs between different income groups. For this purpose, panel ARDL (Auto Regressive Distributed Lag) boundary approach and Granger causality test are used. The results of the study indicate that the causal relationship between FDI (Foreign Direct Investment) and CO2 emissions differs depending on which income group country belongs to. We conclude that, while there is not statistically significant short-run causality relationship running from FDI to CO2 emission for high income, upper middle income and low income group countries, the pollution haven hypothesis is supported for lower middle income group countries.