Foreign Capital Inflows, Trade Openness, and Sustainable Growth Dynamics in Morocco

Abstract

This research paper examines the effects of foreign direct investment in the developing world, often referred to as the Global South. This study uses strong methodological approaches such as vector error correction model estimation to explore the multidimensional effects of foreign direct investment on economic growth, environmental sustainability and energy consumption. The results indicate a complex and non-linear relationship between Foreign Direct Investment and main economic variables, which is often moderated by institutional quality, absorptive capacity and sector-specific variables. The findings do confirm a U-shaped relationship between foreign direct investment and renewable energy consumption at the global level, with possibly negative effects at the start of a country's development, but becoming more positive over time as countries develop and use newer technologies. Besides, the analysis shows that the relationship between foreign direct investment and economic growth has a significant impact on the use of renewable energy, which suggests that the trade-off theory and race-to-the-bottom hypothesis are supported, rather than the conservation hypothesis. For policymakers, this integrated assessment offers valuable advice on how to craft effective policies to maximise the benefits of FDI, minimise potential externalities, and, in particular, how the pollution haven hypothesis should be addressed in environmental sectors.