Nonlinear effect of FDI, economic growth, and industrialization on environmental quality: Evidence from Pakistan

Abstract

Purpose

The purpose of this paper is to analyze the long-run as well as short-run nonlinear effect of foreign direct investment (FDI), economic growth (EG) and industrialization on environmental degradation (carbon dioxide (CO₂) emissions) in Pakistan.

Design/methodology/approach

The study applies a nonlinear autoregressive distributive lag methodology to examine the long-run and short-run relationship among the variables. FDI, EG and industrialization are decomposed into positive and negative variations to examine the nonlinear relationship with CO₂ emissions. Granger causality test is used to examine the direction of causality among the variables. The study uses annual time-series data of Pakistan from 1975 to 2016.

Findings

An increase in FDI has a positive and significant effect on CO₂ emissions in the long run, while a decrease in FDI has a negative and insignificant effect on CO₂ emissions. An increase in EG has a positive and significant effect, while a decrease in EG has a negative and insignificant effect on CO₂ emissions in the long run. An increase in industrialization has a positive and significant effect on CO₂ emissions, while a decrease in industrialization has a negative and insignificant effect on CO₂ emissions. Unidirectional causality flows from CO₂ emissions to a positive partial sum of FDI, EG, industrialization and a negative partial sum of EG in the short run.

Practical implications

The government has to establish the environmental regulation for industrial sectors. Research and development centers are required at government and private levels to control pollution through new technologies. Regulations and restrictions are required on the foreign investor to adopt friendly environmental policies.

Originality/value

This study contributes to the existing literature by analyzing the nonlinear effects of FDI, industrialization and EG on environmental pollution in Pakistan. The main significance of this investigation is to provide the essential evidence, information and better understanding to key stakeholders of the environment.

Citation

Munir, K. and Ameer, A. (2020), "Nonlinear effect of FDI, economic growth, and industrialization on environmental quality: Evidence from Pakistan", Management of Environmental Quality, Vol. 31 No. 1, pp. 223-234. https://doi.org/10.1108/MEQ-10-2018-0186