Do FDI Flows Lead to Environmental Degradation in Developing Economies? A Case Study of Select Asian Economies

Abstract

Developing countries have an urge to boost economic development and they provide a supportive platform for production units with less stringent environment norms. Hence substantial numbers of manufacturing units are moving from developed economies to developing economies. Such a shift is leading to an upsurge in foreign direct investment (FDI) inflows in the developing economies. The study is an attempt to find relationship between FDI (inflows) and environmental degradation using a sample size of 14 developing Asian economies over the period of 1971–2019 using panel autoregressive distributed lag specifications. Study adopts Environmental Kuznet Curve (EKC) technique to validate the existence of pollution havens in the region. Two panel regression equations were formed: first equation covers the link between economic growth (income per capita) and environment by incorporating square of GDP per capita as one of the explanatory variable. The second equation examines the relation between investment and environmental degradation by accommodating square of FDI as one of the dependent variable. The long-run results for first equation validated the presence of EKC, supporting the presence of pollution havens in the region. Long-run results for non-linear FDI depicted positive and significant outcome (using pooled mean group) indicating negligence towards environment. The results indicated that developing countries are not working towards inviting investment flows which are more environment friendly.