Abstract
This paper studies whether foreign direct investment (FDI)-CO2 emissions relationship may change depending on the data-driven estimated threshold levels for the country characteristics (CC) including human capital and governance in a sample of 13 Middle East and North Africa (MENA) economies during the 1996–2019 period. Our results strongly suggest that endogenously estimated CC thresholds matter for the impact of FDI on CO2 emissions. The pollution haven hypothesis, which maintains that FDI is associated with higher levels of pollution, appears to be valid for economies with weak CC. In addition to this, the pollution halo argument suggesting FDI lowers the emissions appears to be hold in countries with strong CC. The results in this study may indicate that policies aiming to improve human capital and governance may be expected not only to increase the economic benefits of FDI in terms of growth but also mitigate the negative environmental impacts of FDI in the MENA region.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Data availability
The datasets used and/or analyzed during the current study are available from the corresponding author on reasonable request.
Notes
The mean pollution level is much higher in oil-exporting countries. This may provide a support for the division of whole sample as oil-exporting and oil-importing countries.
According to World Bank (2020a), MENA countries tend to have an improvement in human capital, but it needs to be developed further. Dimitrova et al. (2020) remark that MENA economies include widespread heterogeneity in human capital. Our results suggest that investing and upgrading the level of human capital diminish the environmental degradation effect of FDI inflows.
In the Appendix, Table 6 reports that this effect is driven by control of corruption, regulatory quality, rule of law and government effectiveness.
According to World Bank report (2020b), MENA is among the worst performers in institutional quality and governance. Dimitrova et al. (2020) note that MENA economies contain widespread heterogeneity in governance indicators. Our results suggest that improvement in governance reduce the environmental impact of FDI inflows on pollution.
The first step of dynamic panel threshold procedure is to remove fixed effects by forward orthogonal deviation transformation. Then, a reduced form regression is obtained for the endogenous variables. By substituting the predicted values into Eq. (6), Hansen (1999) method is applied to find the threshold. Following the identification of threshold, we estimate slope parameters by employing the generalized method of moments procedure.
The principal component analysis retains the variations and linear combinations of the variables and reduces the dimension of the data. In the Appendix, Table 7 shows our panel fixed effects threshold estimation results by using the PC as the thresholding variable. The results in Table 7 are almost the same with our earlier findings.
The selection of thresholding variable that affects the sensitivity of pollution to FDI inflows have been determined based on the theory and literature. Accordingly, human capital and institutional quality and governance are crucially important variables that influence the foreign investment decisions of multinational companies. Trade openness, natural resource endowments, wages, and tax rates etc. can be considered the other variables that effect FDI inflows. The empirical investigation of whether these variables provide data-driven estimated thresholds for the sensitivity of pollution to FDI inflows is an encouraging research agenda for the forthcoming studies.
References
Abdouli M, Hammami S (2017) Investigating the causality links between environmental quality, foreign direct investment and economic growth in MENA countries. Int Bus Rev 26(2):264–278. https://doi.org/10.1016/j.ibusrev.2016.07.004
Abid M (2016) Impact of economic, financial, and institutional factors on CO2 emissions: evidence from sub-Saharan Africa economies. Util Policy 41:85–94. https://doi.org/10.1016/j.jup.2016.06.009
Abumoghli I, Goncalves A (2020) Environmental challenges in the MENA region. Faith Earth Updat. Available online: https://wedocs.unep.org/handle/20.500.11822/31645. Accessed 17 Nov 2021
Acemoglu D, Aghion P, Bursztyn L, Hemous D (2012) The environment and directed technical change. Am Econ Rev 102(1):131–166. https://doi.org/10.1257/aer.102.1.131
Acharyya J (2009) FDI, growth and the environment: evidence from India on CO2 emission during the last two decades. J Econ Dev 34(1):43–58
Ahmed Z, Wang Z (2019) Investigating the impact of human capital on the ecological footprint in India: an empirical analysis. Environ Sci Pollut R 26:26782–26796. https://doi.org/10.1007/s11356-019-05911-7
Ali HS, Zeqiraj V, Lin WL, Law SH, Yusop Z, Bare UAA, Chin L (2019) Does quality institutions promote environmental quality? Environ Sci Pollut R 26:10446–10456. https://doi.org/10.1007/s11356-019-04670-9
Aliyu MA (2005) Foreign direct investment and the environment: pollution haven hypothesis revisited. In Eight Annual Conference on Global Economic Analysis, Lübeck, Germany pp 9–11. Available online: http://globalbizresearch.org/economics/images/files/64007_ID_13005%20final%203rd%20Feb.pdf. Accessed 13 Nov 2021
Aluko OA, Ibrahim M, Vo XV (2021) Toward achieving sustainable development: searching for economic development and globalization thresholds in the foreign direct investment-environmental degradation nexus. Sustain Dev 1– 5 https://doi.org/10.1002/sd.2265
Bakhsh S, Yin H, Shabir M (2021) Foreign investment and CO2 emissions: do technological innovation and institutional quality matter? Evidence from system GMM approach. Environ Sci Pollut R 28(15):19424–19438. https://doi.org/10.1007/s11356-020-12237-2
Bano S, Zhao Y, Ahmad A, Wang S, Liu Y (2018) Identifying the impacts of human capital on carbon emissions in Pakistan. J Clean Prod 183:1082–1092. https://doi.org/10.1016/j.jclepro.2018.02.008
Bashir MF (2022) Discovering the evolution of Pollution Haven Hypothesis: A literature review and future research agenda. Environ Sci Pollut R 29:48210–48232. https://doi.org/10.1007/s11356-022-20782-1
Bokpin GA (2017) Foreign direct investment and environmental sustainability in Africa: the role of institutions and governance. Res Int Bus Finance 39:239–247. https://doi.org/10.1016/j.ribaf.2016.07.038
Borensztein E, De Gregorio J, Lee JW (1998) How does foreign direct investment affect economic growth? J Int Econ 45(1):115–135. https://doi.org/10.1016/S0022-1996(97)00033-0
Bouchoucha N (2021) Does institutional quality mitigate the effect of Foreign Direct Investment on environmental quality: evidence of MENA countries. University Library of Munich, Germany
Buckley PJ, Chen L, Clegg LJ, Voss H (2016) Experience and FDI risk-taking: A microfoundational reconceptualization. J in Manag 22(2):131–146
Cantwell J, Dunning JH, Lundan SM (2010) An evolutionary approach to understanding international business activity: the co-evolution of MNEs and the institutional environment. J Int Bus Stud 41(4):567–586. https://doi.org/10.1057/jibs.2009.95
Christmann P (2004) Multinational companies and the natural environment: determinants of global environmental policy. Acad Manage J 47(5):747–760. https://doi.org/10.5465/20159616
Coase R (1937) The Nature of the Firm. Economica 4(16):394–395
Cole MA, Elliott RJ, Zhang J (2011) Growth, foreign direct investment, and the environment: evidence from Chinese cities. J Reg Sci 51(1):121–138. https://doi.org/10.1111/j.1467-9787.2010.00674.x
Copeland BR, Taylor MS (2005) Free trade and global warming: a trade theory view of the Kyoto protocol. J Environ Econ Manag 49(2):205–234. https://doi.org/10.1016/j.jeem.2004.04.006
Daniele V, Marani U (2006) Do institutions Matter for FDI? A comparative Analysis of the MENA countries. MPRA Paper No.2426. Retrieved from http://mpra.ub.uni-uenchen.de/2426/MPRA
Dimitrova A, Rogmans T, Triki D (2020) Country-specific determinants of FDI inflows to the MENA region: A systematic review and future research directions. Multinatl Bus Rev 28(1):1–38. https://doi.org/10.1108/MBR-01-2019-0003
Feenstra RC, Inklaar R, Timmer MP (2015) The next generation of the Penn world table. Am Econ Rev 105(10):3150–3182. https://doi.org/10.1257/aer.20130954
Grossman GM, Krueger AB (1995) Economic growth and the environment. The Q J Econ 110(2):353–377. https://doi.org/10.2307/2118443
Hansen BE (1999) Threshold effects in non-dynamic panels: estimation, testing, and inference. J Econom 93(2):345–368. https://doi.org/10.1016/S0304-4076(99)00025-1
He J (2006) Pollution haven hypothesis and environmental impacts of foreign direct investment: the case of industrial emission of sulfur dioxide (SO2) in Chinese provinces. Ecol Econ 60(1):228–245. https://doi.org/10.1016/j.ecolecon.2005.12.008
Jorgenson AK (2009) Foreign direct investment and the environment, the mitigating influence of institutional and civil society factors, and relationships between industrial pollution and human health: a panel study of less-developed countries. Organ Environ 22(2):135–157. https://doi.org/10.1177/1086026609338163
Kaufmann D, Kraay A, Mastruzzi M (2011) The worldwide governance indicators: methodology and analytical issues. Hague J Rule Law 3(2):220–246
Kaufmann D, Kraay A, Mastruzzi M (2005) Governance matters IV: governance indicators for 1996–2004. World Bank Policy Research Working Paper No. 3630. World Bank, Washington, DC
Khan Z, Ali M, Kırıkkaleli D, Wahab S, Jiao Z (2020) The impact of technological innovation and public-private partnership investment on sustainable environment in China: consumption-based carbon emissions analysis. Sustain Dev 28(5):1317–1330. https://doi.org/10.1002/sd.2086
King AA, Shaver JM (2001) Are aliens green? Assessing foreign establishments’ environmental conduct in the United States. Strateg Manage J 22(11):1069–1085. https://doi.org/10.1002/smj.201
Kivyiro P, Arminen H (2014) Carbon dioxide emissions, energy consumption, economic growth, and foreign direct investment: causality analysis for Sub-Saharan Africa. Energy 74:595–606. https://doi.org/10.1016/j.energy.2014.07.025
Kostova T, Hult TM (2016) Meyer and Peng’s 2005 article as a foundation for an expanded and refined international business research agenda: Context, organizations, and theories. J Int Bus Stud 47(1):23–32
Kremer S, Bick A, Nautz D (2013) Inflation and growth: new evidence from a dynamic panel threshold analysis. Empir Econ 44(2):861–878. https://doi.org/10.1007/s00181-012-0553-9
Kwon DB (2009) Human capital and its measurement. In The 3rd OECD World Forum on “Statistics, Knowledge and Policy” Charting Progress, Building Visions, Improving Life, pp 27–30
Lan J, Kakinaka M, Huang X (2012) Foreign direct investment, human capital andenvironmental pollution in China. Environ Resour Econ 51(2):255–275. https://doi.org/10.1007/s10640-011-9498-2
Lee CG (2009) Foreign direct investment, pollution and economic growth: evidence from Malaysia. Appl Econ 41(13):1709–1716. https://doi.org/10.1080/00036840701564376
Levinson A, Taylor MS (2008) Unmasking the pollution haven effect. Int Econ Rev 49(1):223–254. https://doi.org/10.1111/j.1468-2354.2008.00478.x
List JA, Co CY (2000) The effects of environmental regulations on foreign direct investment. J Environ Econ Manag 40(1):1–20. https://doi.org/10.1006/jeem.1999.1095
Mengistu AA, Adhikary BK (2011) Does good governance matter for FDI inflows? Evidence from Asian economies. Asia Pac Bus Rev 17(3):281–299. https://doi.org/10.1080/13602381003755765
Mielnik O, Goldemberg J (2002) Foreign direct investment and decoupling between energy and gross domestic product in developing countries. Energy Policy 30(2):87–89. https://doi.org/10.1016/S0301-4215(01)00080-5
Muhammad S, Long X (2021) Rule of law and CO2 emissions: a comparative analysis across 65 belt and road initiative (BRI) countries. J Clean Prod 279:123539. https://doi.org/10.1016/j.jclepro.2020.123539
Mukhopadhyay K (2006) Impact on the environment of Thailand’s trade with OECD countries. Asia-Pac Trade Invest Rev 2(1):25–46
Nelson RR, Phelps E (1966) Investment in humans, technology diffusion and economic growth. Am Econ Rev 56(2):69–75
Noorbakhsh F, Paloni A, Youssef A (2001) Human capital and FDI inflows to developing countries: new empirical evidence. World Dev 29(9):1593–1610. https://doi.org/10.1016/S0305-750X(01)00054-7
North DC (1990) A transaction cost theory of politics. J Theor Polit 2:355–367. https://doi.org/10.1177/0951692890002004001
Omri A, Hadj TB (2020) Foreign investment and air pollution: do good governance and technological innovation matter? Environ Res 185:109469. https://doi.org/10.1016/j.envres.2020.109469
Ozturk I, Acaravci A (2013) The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Econ 36:262–267. https://doi.org/10.1016/j.eneco.2012.08.025
Pao HT, Tsai CM (2010) CO2 emissions, energy consumption and economic growth in BRIC countries. Energy Policy 38(12):7850–7860. https://doi.org/10.1016/j.enpol.2010.08.045
Romer PM (1990) Endogenous technical change. J Polit Econ 98(5):71–102. https://doi.org/10.1086/261725
Rutherford M (2001) Institutional economics: then and now. J Econ Perspect 15(3):173–194. https://doi.org/10.1257/jep.15.3.173
Salahuddin M, Alam K, Ozturk I, Sohag K (2018) The effects of electricity consumption, economic growth, financial development and foreign direct investment on CO2 emissions in Kuwait. Renew Sust Energy Rev 81:2002–2010. https://doi.org/10.1016/j.rser.2017.06.009
Seker F, Ertugrul HM, Cetin M (2015) The impact of foreign direct investment on environmental quality: a bounds testing and causality analysis for Turkey. Renew Sust Energy Rev 52:347–356. https://doi.org/10.1016/j.rser.2015.07.118
Sekkat K, Veganzones-Varoudakis MA (2007) Openness, investment climate, and FDI in developing countries. Rev Dev Econ 11(4):607–620. https://doi.org/10.1111/j.1467-9361.2007.00426.x
Shahbaz M, Nasreen S, Abbas F, Anis O (2015) Does foreign direct investment impede environmental quality in high-, middle-, and low-income countries? Energy Econ 51:275–287. https://doi.org/10.1016/j.eneco.2015.06.014
Shahbaz M, Balsalobre-Lorente D, Sinha A (2019) Foreign direct investment–CO2 emissions nexus in Middle East and North African countries: importance of biomass energy consumption. J Clean Prod 217:603–614. https://doi.org/10.1016/j.jclepro.2019.01.282
Shobande OA, Asongu SA (2021) Financial development, human capital development and climate change in East and Southern Africa. Enviro Sci Pollut R 28(46):65655–65675. https://doi.org/10.1007/s11356-021-15129-1
Shojaeenia MA, Salehnia N, Sadati SSM (2022) Clean to dirty energy consumption ratio, institutional quality, and welfare; an inter-continental panel quantile analysis. J Clean Prod 364:132703. https://doi.org/10.1016/j.jclepro.2022.132703
Siciliano G, Wallbott L, Urban F, Dang AN, Lederer M (2021) Low-carbon energy, sustainable development, and justice: towards a just energy transition for the society and the environment. Sustain Dev 29:1049–1061. https://doi.org/10.1002/sd.2193
Tang CF, Abosedra S, Naghavi N (2021) Does the quality of institutions and education strengthen the quality of the environment? Evidence from a global perspective. Energy 218:119303. https://doi.org/10.1016/j.energy.2020.119303
Wang DT, Chen WY (2014) Foreign direct investment, institutional development, and environmental externalities: evidence from China. J Environ Manage 135:81–90. https://doi.org/10.1016/j.jenvman.2014.01.013
Wheeler D (2001) Racing to the bottom? Foreign investment and air pollution in developing countries. J Environ Dev 10(3):225–245. https://doi.org/10.1177/10704965-0101003-02
World Bank (2020a) A new state of mind: greater transparency and accountability in the Middle East and North Africa. World Bank. Retrieved from https://openknowledge.worldbank.org/handle/10986/38065
World Bank (2020b) The human capital index 2020 update: Human capital in the time of COVID-19. World Bank. Retrieved from https://documents1.worldbank.org/curated/en/456901600111156873/pdf/The-Human-Capital-Index-2020-Update-Human-Capital-in-the-Time-of-COVID-19.pdf
Xie Q, Wang X, Cong X (2020) How does foreign direct investment affect CO2 emissions in emerging countries? New findings from a nonlinear panel analysis. J Clean Prod 249:119422. https://doi.org/10.1016/j.jclepro.2019.119422
Xing Y, Kolstad CD (2002) Do lax environmental regulations attract foreign investment? Environ Resour Econ 21(1):1–22. https://doi.org/10.1023/A:1014537013353
Xu B (2000) Multinational Enterprises, Technology Diffusion and Host Country Productivity Growth. J Dev Econ 62:477–493. https://doi.org/10.1016/S0304-3878(00)00093-6
Zhang YJ (2011) The impact of financial development on carbon emissions: an empirical analysis in China. Energy Policy 39(4):2197–2203. https://doi.org/10.1016/j.enpol.2011.02.026
Zhang N, Yu K, Chen Z (2017) How does urbanization affect carbon dioxide emissions? A cross-country panel data analysis. Energy Policy 107:678–687. https://doi.org/10.1016/j.enpol.2017.03.072
Zhu H, Duan L, Guo Y, Yu K (2016) The effects of FDI, economic growth and energy consumption on carbon emissions in ASEAN-5: evidence from panel quantile regression. Econ Model 58:237–248. https://doi.org/10.1016/j.econmod.2016.05.003
Acknowledgements
We thank conference participants and Ahmed Ghoneim for their helpful comments and suggestions.
Funding
This work was sponsored by the Economic Research Forum (ERF) and has benefited from both financial and intellectual support. The views expressed in this work are entirely those of the author(s) and should not be attributed to ERF, its Board of Trustees or donors.
Author information
Authors and Affiliations
Contributions
Fatma Taşdemir: conceptualization, methodology, investigation, writing—reviewing and editing.
Seda Ekmen Özçelik: conceptualization, methodology, investigation, writing—reviewing and editing.
Corresponding author
Ethics declarations
Ethics approval and consent to participate
Not applicable.
Consent for publication
Not applicable.
Competing interests
The authors declare no competing interests.
Additional information
Responsible Editor: Eyup Dogan
Publisher's note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
An earlier version of this paper was presented at the ERF 28th conference: Revisiting Macroeconomic Management in Times of Crisis and Beyond.
Rights and permissions
Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
About this article
Cite this article
Taşdemir, F., Özçelik, S.E. Do human capital and governance thresholds matter for the environmental impact of FDI? The evidence from MENA countries. Environ Sci Pollut Res 30, 41741–41754 (2023). https://doi.org/10.1007/s11356-023-25188-1
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11356-023-25188-1
Keywords
- Foreign direct investment
- CO2 emissions
- Human capital
- Governance
- Middle East and North Africa economies
- Panel threshold model