The Role of Economic Growth, Foreign Direct Investment in Determining Environmental Degradation: A Panel Data Analysis

Abstract

This study explores the non-linear relationship between foreign direct investment and environmental degradation using panel data from 110 economies across developed and developing regions. The analysis investigates the existence of an environmental Kuznets curve, revealing the complex impact of foreign direct investment on environmental outcomes. Findings confirm the presence of this curve, indicating that environmental degradation initially rises with increased foreign direct investment before stabilizing or declining at higher economic development levels. However, results also show a positive link between foreign direct investment and environmental degradation, particularly in developing economies. Further examination across income groups and regions highlights variations in this relationship, suggesting that the effects of foreign direct investment on the environment are influenced by economic conditions and policy frameworks. The study emphasizes the need for tailored policies that balance economic growth with environmental sustainability. Regulatory mechanisms should be strengthened to ensure that foreign direct investment promotes sustainable practices rather than exacerbating environmental harm. Additionally, regional cooperation can facilitate knowledge sharing and the implementation of best practices to mitigate pollution while fostering economic expansion. Future research should explore sector-specific impacts of foreign direct investment on environmental degradation, considering factors such as industrial composition, technological advancements, and regulatory differences. By deepening the understanding of these dynamics, policymakers can craft targeted strategies to maximize the economic benefits of foreign direct investment while minimizing its environmental costs, promoting sustainable development across diverse economic contexts.