Foreign Direct Investment,Economic Growth And Environmental Pollution:Evidence From South Asian Countries

In the era of industrialization and development,foreign direct investment(FDI)plays a key role in the economic development of the countries.South Asian countries are the major destination for foreign investors like other developing countries.At the same time,South Asian countries are facing different climate change challenges.The main reason behind the climate changes in this region is the consistent increase in the level of greenhouse gases(GHGs)particularly carbon dioxide(CO2)due to usage of heavy chemical machineries in the production and other anthropogenic issues.This is one of the major cause of concerns for the security of billions of people living in South Asian region.The objective of this study is to analyse the interaction between foreign direct investment(FDI),economic growth and environmental pollution(EP)among economic and social factors for the group and individual countries.The sample of this study consists of five South Asian countries namely-Bangladesh,India,Nepal,Pakistan and Sri Lanka.In this dissertation,we theoretically analysed the relationship between FDI and economic growth based on modernization and dependency theories.Furthermore,we theoretically analysed the relationship between FDI,economic growth and environmental pollution(EP)based on environmental Kuznets curve(EKC)and environmental hypotheses.Moreover,we provided status quo analysis of FDI,economic growth and environmental pollution(EP)in South Asian countries over the period of time.For the empirical analysis,we examined the relationship between FDI and economic growth among socioeconomic factors by using ordinary least squares(OLS),fixed effects model(FEM)and feasible generalized least squares method(FGLS).In addition,we investigated the dynamic causal relationship between FDI,economic growth and environmental pollution(EP)among economic factors by using dynamic ordinary least squares(DOLS),panel cointegration,panel vector error correction model(PVECM)and panel vector autoregressions(PVAR).The empirical results about the relationship between FDI and economic growth among socioeconomic indicators for the group of countries demonstrated that FDI significantly positively cause to economic growth,which validate the modernization theory.From the socioeconomic indicators,voice and accountability,rule of law,labour force,trade openness and infrastructure showed significant positive effect on economic growth,while government effectiveness,regulatory quality,domestic capital and government expenditure demonstrated significant negative effect on economic growth.On the other hand,the empirical results for the individual South Asian countries showed that political stability and security,and regulatory quality significantly positively influenced to economic growth,while voice and accountability,government effectiveness and labour force revealed significant negative effects on economic growth for Bangladesh.In case of India,political stability and security,rule of law and domestic capital demonstrated significant positive effect on economic growth,whereas control of corruption and labour force showed significant negative influence on economic growth.In case of Pakistan,government effectiveness revealed significant positive results,while rule of law and government expenditure significantly negatively effect on economic growth for Sri Lanka.The empirical results about the relationship between FDI,economic growth and EP among economic indicators for the group of South Asian countries confirmed the presence of unidirectional causality running from economic growth to CO2 emissions,bidirectional causality between FDI and CO2 emissions,and unidirectional causality from economic growth to FDI inflows.These results validate the environmental Kuznets curve(EKC)and pollution-haven hypothesis.From the economic indicators,urban population and energy consumption confirmed the causality with CO2 emissions.Furthermore,domestic capital,labour force and inflation rate confirmed the causal relationship with economic growth.In addition,domestic capital,labour force,exchange rate and trade openness validated the causality with FDI inflows.The results for the individual South Asian countries confirmed the unidirectional causality from economic growth to CO2 emissions and FDI inflows,and bidirectional causality between FDI and CO2 emissions for Bangladesh.In case of India,the results validated unidirectional causal relationship from FDI to economic growth,while the results confirmed the presence of bidirectional causality between CO2 emissions and economic growth for Nepal.In case of Pakistan,the results revealed the presence of bidirectional causal relationship between CO2 emissions and FDI inflows.Furthermore,the results confirmed the bidirectional causality between CO2 emissions and economic growth for Sri LankaBased on the results of this study,it is suggested that South Asian countries should attract more FDI by providing conducive environment to investors.These countries should arrange more diversified foreign investment by considering the multiplier effects of demand of different sectors and discourage loan based investment to ensure long-run positive benefits from FDI.Moreover,these countries should significantly improve the governance structure by stabilizing the political situation,improving the quality of public and civil services,controlling the corruption and formulate sound policies to promote private sector development.Additionally,these countries should made strict environmental regulations in the growth process for the environmental protection.Investment oriented and trade liberalization polices should be adopted to gain the benefits of green technology.