Environmental Accounting of Financial Development and Foreign Investment: Spatial Analyses of East Asia

Abstract

This paper aspires to examine the environmental effects of financial market development (FMD), foreign direct investment (FDI), and trade openness on the CO2 emissions per capita along with the environmental Kuznets curve (EKC) hypothesis in six East Asian countries from 1991–2014. For this purpose, spatial econometrics is applied to consider the spillover effects from neighboring countries. The results of the study corroborate the spillover effects from neighboring countries’ CO2 emissions per capita, FMD, FDI, and trade openness, and the EKC hypothesis is proven true in this region. Local FDI inflows, trade openness, and energy intensity are found to be responsible for local environmental degradation. Local FMD has an insignificant environmental effect, but neighboring countries’ FMD has contributed to the local CO2 emissions per capita. Further, positive (negative) environmental spillover effects are found from neighboring countries’ FDI (trade openness).