Does foreign direct investment affect environmental degradation: Evidence from largest carbon intense countries

by Ozlem Kutlu Furtuna, Selin Atis

Foreign Direct Investment (FDI) and environmental degradation are some of the most controversial debates, especially in the context of global warming and climate change. This study aims to shed light on the impact of FDI on environmental degradation in the countries with the highest carbon dioxide (CO₂) emissions, taking into account 513 country-years between the years 1996 and 2022. CO₂ and the ecological footprint were used as indicators of environmental degradation. The possible non-linear linkage between FDI and environmental degradation has also been analyzed. Gross domestic product (GDP) growth and inflation rate were used as control variables. The results of the panel data analysis show a U-shaped relationship between FDI and carbon emissions which means carbon emissions decrease to a certain level with increasing FDI investment and after this level, increasing FDI increases the environmental degradation in terms of carbon emissions. Moreover, FDI and the non-linear form of FDI have no significant influence on ecological footprint. This study also highlights the importance of international agreements and frameworks, such as the Sustainable Development Goals and the Paris Agreement, in guiding nations towards a more sustainable future. These empirical results are vital for regulators, emphasizing the need for a holistic and multidimensional approach to both economic prosperity and environmental protection.