The impact of Foreign Direct Investment, Institutional Quality, and Industrialization on Carbon Emissions: Evidence from High-Income and Upper-Middle-Income Countries
Keywords:
Foreign direct investment, carbon emissions, industrialization, institutional quality.Abstract
This study investigates the relationship between foreign direct investment (FDI), institutional quality, industrialization, and carbon emissions across 48 high-income and 37 upper-middle-income countries for the years 2002 to 2022 by employing panel quantile regression analysis using R software. The results show that inward FDI has increased pollution in high-income countries by the coefficient of 0.016 to 0.026 while it has reduced carbon emissions in upper-middle-income countries by the coefficient of -0.012 to 0.01. In outward FDI, although it is expected that upper-middle income countries will end up with low carbon emissions, the results show that carbon emissions increase in these countries by the coefficient of -0.025 to 0.08. Industrialization has significantly raised pollution in both groups, while institutional quality has a positive impact in high-income countries and a negative influence in upper-middle-income nations, implying the mixed impact of good governance in environmental management. The findings highlight the dual effect of FDI on carbon emissions, indicating that its environmental impact varies according to the extent of policy interventions, i.e. carbon taxation, environmental regulation, designed to balance economic growth with environmental protection. The results offer valuable insights for companies and policymakers seeking to align economic growth with environmental sustainability across different stages of economic development.
References
Abdullahi, A. D. U. S., Ibrahim, S., Saini, W. N. W. A., & Law, S. H. (2023). Foreign direct investment and its impact on CO₂ emissions at various levels of economic development. International Journal of Economics and Management, 17(3), 293-303. https://doi.org/10.47836/ijeam.17.3.01
Abid, M. (2016). Impact of economic, financial, and institutional factors on CO₂ emissions: Evidence from Sub-Saharan Africa economies. Utilities Policy, 41, 85-94. https://doi.org/10.1016/j.jup.2016.06.009
Abid, M. Y., Khan, M. T., & Rehman, H. ur. (2022). Does institutional quality improve environmental quality? New evidence from NARDL approach. Review of Economics and Development Studies, 8(2), 439. https://doi.org/10.47067/reads.v8i2.439
Abozriba, A. S., & Khalifa, W. M. (2026). Unveiling the connection between outward foreign direct investment and environmental quality in Turkey: A frequency domain causality analysis. Sustainability, 18(3), 1189. https://doi.org/10.3390/su18031189
Adeneye, Y. B., Jaaffar, A. H., Ooi, C. A., & Ooi, S. K. (2021). Nexus between carbon emissions, energy consumption, urbanization and economic growth in Asia: Evidence from common correlated effects mean group estimator (CCEMG). Frontiers in Energy Research, 8, 610577. https://doi.org/10.3389/fenrg.2020.610577
Alshubiri, F., & Elheddad, M. (2020). Foreign finance, economic growth and CO₂ emissions nexus in OECD countries. International Journal of Climate Change Strategies and Management, 12(2), 161-181. https://doi.org/10.1108/IJCCSM-12-2018-0082
Baia, J., & Kaob, C. (2006). On the estimation and inference of a panel cointegration model with cross-sectional dependence. Contributions to Economic Analysis. In: Panel Data Econometrics Theoretical Contributions and Empirical Applications, pages 3-30, Emerald Group Publishing Limited. https://doi.org/10.1016/S0573-8555(06)74001-9
Balsalobre-Lorente, D., Gokmenoglu, K. K., Taspinar, N., & Cantos-Cantos, J. M. (2019). An approach to the pollution haven and pollution halo hypotheses in MINT countries. Environmental Science and Pollution Research, 26(22), 23010-23026. https://doi.org/10.1007/s11356-019-05446-x
Balsalobre-Lorente, D., Ibáñez-Luzón, L., Usman, M., & Shahbaz, M. (2022). The environmental Kuznets curve, based on the economic complexity, and the pollution haven hypothesis in PIIGS countries. Renewable Energy, 185, 1441-1455. https://doi.org/10.1016/j.renene.2021.10.059
Bommer, R. (1999). Environmental policy and industrial competitiveness: The pollution-haven hypothesis reconsidered. Review of International Economics, 7(2), 342-355. https://doi.org/10.1111/1467-9396.00168
Brinkley, C. (2014). Decoupled: Successful planning policies in countries that have reduced per capita greenhouse gas emissions with continued economic growth. Environment and Planning C: Politics and Space, 32(6), 1083-1099. https://doi.org/10.1068/c12202
De Hoyos, R. E., & Sarafidis, V. (2006). Testing for cross-sectional dependence in panel-data models. The Stata Journal, 6(4), 482-496. https://doi.org/10.1177/1536867X0600600403
Destek, M. A., & Okumus, I. (2019). Does pollution haven hypothesis hold in newly industrialized countries? Evidence from ecological footprint. Environmental Science and Pollution Research, 26(23), 23689-23695. https://doi.org/10.1007/s11356-019-05614-z
Dufrenot, G., Mignon, V., & Tsangarides, C. (2010). The trade-growth nexus in the developing countries: A quantile regression approach. Review of World Economics, 146(4), 731-761. https://doi.org/10.1007/s10290-010-0067-5
Godil, D. I., Sharif, A., Agha, H., & Jermsittiparsert, K. (2020). The dynamic nonlinear influence of ICT, financial development, and institutional quality on CO₂ emission in Pakistan: New insights from QARDL approach. Environmental Science and Pollution Research, 27(19), 24190-24200. https://doi.org/10.1007/s11356-020-08619-1
Grossman, G. M., & Krueger, A. B. (1995). Economic growth and the environment. The Quarterly Journal of Economics, 110(2), 353-377. https://doi.org/10.2307/2118443
Guloglu, B., Caglar, A. E., & Pata, U. K. (2023). Analyzing the determinants of the load capacity factor in OECD countries: evidence from advanced quantile panel data methods. Gondwana Research, 118, 92-104. https://doi.org/10.1016/j.gr.2023.02.013
Haldar, A., & Sethi, N. (2021). Effect of institutional quality and renewable energy consumption on CO₂ emissions-An empirical investigation for developing countries. Environmental Science and Pollution Research, 28(12), 15485-15503. https://doi.org/10.1007/s11356-020-11532-2
Han, H. (2019). Governance for green urbanisation: Lessons from Singapore's green building certification scheme. Environment and Planning C: Politics and Space, 37(1), 137-156. https://doi.org/10.1177/2399654418778596
Harding, M., & Lamarche, C. (2014). Estimating and testing a quantile regression model with interactive effects. Journal of Econometrics, 178, 101-113. https://doi.org/10.1016/j.jeconom.2013.08.010
Harding, M., Lamarche, C., & Pesaran, M. H. (2020). Common correlated effects estimation of heterogeneous dynamic panel quantile regression models. Journal of Applied Econometrics, 35(3), 294-314. https://doi.org/10.1002/jae.2753
Ibrahim, M. H., & Law, S. H. (2016). Institutional quality and CO₂ emission-Trade relations: Evidence from Sub-Saharan Africa. South African Journal of Economics, 84(2), 323-340. https://doi.org/10.1111/saje.12095
Jinapor, J. A., Abor, J. Y., & Graham, M. (2024). FDI, industrialisation and environmental quality in SSA-the role of institutional quality towards environmental sustainability. Humanities and Social Sciences Communications, 11(1), 1-15. https://doi.org/10.1057/s41599-024-04000-6
Kar, A. K. (2022). Environmental Kuznets curve for CO2 emissions in Baltic countries: an empirical investigation. Environmental Science and Pollution Research, 29(31), 47189-47208. https://doi.org/10.1007/s11356-022-19103-3
Karavias, Y., & Tzavalis, E. (2014). Testing for unit roots in short panels allowing for a structural break. Computational Statistics & Data Analysis, 76, 391-407. https://doi.org/10.1016/j.csda.2012.10.014
Kayani, U. N., Sadiq, M., Aysan, A. F., Haider, S. A., & Nasim, I. (2023). The impact of investment, economic growth, renewable energy, urbanisation, and tourism on carbon emissions: Global evidence. International Journal of Energy Economics and Policy, 13(2), 1-12. https://doi.org/10.32479/ijeep.14042
Koenker, R., & Bassett, G., Jr. (1978). Regression quantiles. Econometrica, 46(1), 33-50. https://doi.org/10.2307/1913643
Koenker, R. (2004). Quantile regression for longitudinal data. Journal of Multivariate Analysis, 91(1), 74-89. https://doi.org/10.1016/j.jmva.2004.05.006
Kutlu Furtuna, O., & Atis, S. (2024). Does foreign direct investment affect environmental degradation: Evidence from largest carbon intense countries. PLOS ONE, 19(11), e0314232. https://doi.org/10.1371/journal.pone.0314232
Li, J., & Lin, B. (2023). Reexamining the impact of foreign direct investment on carbon emissions: Does per capita GDP matter? Humanities and Social Sciences Communications, 10(1), 403. https://doi.org/10.1057/s41599-023-01895-5
Lin, X., & He, L.-Y. (2023). 'Going global' and pollution in home country: Evidence from Chinese industrial firms. Economics of Transition and Institutional Change, 31(1), 123-145. https://doi.org/10.1111/ecot.12370
Machado, J. A., & Silva, J. S. (2019). Quantiles via moments. Journal of Econometrics, 213(1), 145-173. https://doi.org/10.1016/j.jeconom.2019.04.009
Mani, M., & Wheeler, D. (1998). In search of pollution havens? Dirty industry in the world economy, 1960 to 1995. Journal of Environment & Development, 7(3), 215-247. https://doi.org/10.1177/107049659800700302
Mert, M., & Caglar, A. E. (2020). Testing pollution haven and pollution halo hypotheses for Turkey: A new perspective. Environmental Science and Pollution Research, 27(26), 32933-32943. https://doi.org/10.1007/s11356-020-09469-7
Yang, B., Ali, M., Hashmi, S. H., & Jahanger, A. (2022). Do income inequality and institutional quality affect CO2 emissions in developing economies?. Environmental Science and Pollution Research, 29(28), 42720-42741. https://doi.org/10.1007/s11356-021-18278-5
Musa, M., Gao, Y., Rahman, P., Albattat, A., Ali, M. A. S., & Saha, S. K. (2024). Sustainable development challenges in Bangladesh: An empirical study of economic growth, industrialization, energy consumption, foreign investment, and carbon emissions-using dynamic ARDL model and frequency domain causality approach. Clean Technologies and Environmental Policy, 26(6), 1799-1823. https://doi.org/10.1007/s10098-023-02680-3
Nair, M., Arvin, M. B., Pradhan, R. P., & Bahmani, S. (2021). Is higher economic growth possible through better institutional quality and a lower carbon footprint? Evidence from developing countries. Renewable Energy, 162, 1784-1796. https://doi.org/10.1016/j.renene.2020.11.056
Nathaniel, S. P., Yalçiner, K., & Bekun, F. V. (2021). Assessing the environmental sustainability corridor: Linking natural resources, renewable energy, human capital, and ecological footprint in BRICS. Resources Policy, 70, 101924. https://doi.org/10.1016/j.resourpol.2020.101924
Neves, S. A., Marques, A. C., & Patrício, M. (2020). Determinants of CO₂ emissions in European Union countries: Does environmental regulation reduce environmental pollution? Economic Analysis and Policy, 68, 114-125. https://doi.org/10.1016/j.eap.2020.09.005
Nguyen, T. P., & Duong, T. T. T. (2025). Asymmetric effects of fiscal policy and foreign direct investment inflows on CO₂ emissions-an application of nonlinear ARDL. Sustainability, 17(6), 2503. https://doi.org/10.3390/su17062503
Nguyen-Thanh, N., Chin, K.-H., & Nguyen, V. T. (2022). Does the pollution halo hypothesis exist in this "better" world? The evidence from STIRPAT model. Environmental Science and Pollution Research, 29(35), 53158-53172. https://doi.org/10.1007/s11356-022-21654-4
Niemeier, D., Grattet, R., & Beamish, T. (2015). Blueprinting and climate change: Regional governance and civic participation in land use and transportation planning. Environment and Planning C: Government and Policy, 33(6), 1600-1617. https://doi.org/10.1177/0263774X15614181
Paramati, S. R., Mo, D., & Gupta, R. (2017). The effects of stock market growth and renewable energy use on CO₂ emissions: Evidence from G20 countries. Energy Economics, 66, 360-371. https://doi.org/10.1016/j.eneco.2017.06.025
Paramasivan, M., Kumar, N. S., & Jothimani, S. (2022). Do greater amounts of FDI cause higher pollution levels? Evidence from OECD countries. Journal of Policy Modeling, 44(1), 147-169. https://doi.org/10.1016/j.jpolmod.2021.10.004
Parveen, S., Khan, S., Kamal, M. A., Abbas, M. A., Syed, A. A., & Grima, S. (2023). The influence of industrial output, financial development, and renewable and non-renewable energy on environmental degradation in newly industrialized countries. Sustainability, 15(6), 4742. https://doi.org/10.3390/su15064742
Pesaran, M. H. (2004). General diagnostic tests for cross-sectional dependence in panels (Cambridge Working Papers in Economics No. 435). University of Cambridge.
Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74(4), 967-1012. https://doi.org/10.1111/j.1468-0262.2006.00692.x
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265-312. https://doi.org/10.1002/jae.951
Peseran, M. H., & Smith, R. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics, 68, 79-113. https://doi.org/10.1016/0304-4076(94)01644-F
Pham, P. M., Nguyen, T. D., Nguyen, M., & Tran, N. T. (2025). FDI inflows and carbon emissions: New global evidence. Discover Sustainability, 6(1), 432. https://doi.org/10.1007/s43621-025-01292-9
Phuc Nguyen, C., Ai Nguyen, N., Schinckus, C., & Dinh Su, T. (2018). The ambivalent role of institutions in the CO₂ emissions: The case of emerging countries. International Journal of Energy Economics and Policy, 8(5), 7-17. http://hdl.handle.net/11159/2609
Rahman, M. M., Nepal, R., & Alam, K. (2023). Does institutional quality influence the relationship between urbanization and CO₂ emissions? PLOS ONE, 18(10), e0291930. https://doi.org/10.1371/journal.pone.0291930
Salman, M., Long, X., Dauda, L., & Mensah, C. N. (2019). The impact of institutional quality on economic growth and carbon emissions: Evidence from Indonesia, South Korea, and Thailand. Journal of Cleaner Production, 241, 118331. https://doi.org/10.1016/j.jclepro.2019.118331
Sapkota, P., & Bastola, U. (2017). Foreign direct investment, income, and environmental pollution in developing countries: Panel data analysis of Latin America. Energy Economics, 64, 206-212. https://doi.org/10.1016/j.eneco.2017.04.001
Shahbaz, M., Nasreen, S., Abbas, F., & Anis, O. (2015). Does foreign direct investment impede environmental quality in high-, middle-, and low-income countries? Energy Economics, 51, 275-287. https://doi.org/10.1016/j.eneco.2015.06.014
Shahzad, U., Lv, Y., Doğan, B., & Xia, W. (2021). The impacts of FDI inflows on carbon emissions: Economic development and regulatory quality as moderators. Frontiers in Energy Research, 9, 820596. https://doi.org/10.3389/fenrg.2021.820596
Singhania, M., & Saini, N. (2021). Demystifying pollution haven hypothesis: Role of FDI. Journal of Business Research, 123, 516-528. https://doi.org/10.1016/j.jbusres.2020.10.007
Tripathy, P., Brahmi, M., Pallayil, B., & Mishra, B. R. (2025). Mediating effects of foreign direct investment inflows on carbon dioxide emissions. Economies, 13(1), 18. https://doi.org/10.3390/economies13010018
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709-748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
Westerlund, J. (2008). Panel cointegration tests of the Fisher effect. Journal of Applied Econometrics, 23(2), 193-233. https://doi.org/10.1002/jae.967
World Bank. (2024). World Bank country classifications by income level for 2024-2025. https://blogs.worldbank.org/en/opendata/world-bank-country-classifications-by-income-level-for-2024-2025
Wu, H., & Wang, H. (2023). Will trade protection trigger a surge in investment-related CO₂ emissions? Evidence from multi-regional input-output model. Sustainability, 15(13), 10033. https://doi.org/10.3390/su151310033
Xaisongkham, S., & Liu, X. (2024). Institutional quality, employment, FDI and environmental degradation in developing countries: Evidence from the balanced panel GMM estimator. International Journal of Emerging Markets, 19(7), 1920-1939. https://doi.org/10.1108/IJOEM-10-2021-1583
Sohag, K., Al Mamun, M., Uddin, G. S., & Ahmed, A. M. (2017). Sectoral output, energy use, and CO2 emission in middle-income countries. Environmental Science and Pollution Research, 24(10), 9754-9764. https://doi.org/10.1007/s11356-017-8599-z
Zhang, H., Wang, P., & Wood, J. (2022). Does institutional quality matter for the nexus between environmental quality and economic growth? In Environmental Economics and Sustainable Development (pp. 45-68). Routledge. https://doi.org/10.4324/9781003153580-3
Zhang, Y., Jin, Y., Chevallier, J., & Shen, B. (2016). The effect of corruption on carbon dioxide emissions in APEC countries: A panel quantile regression analysis. Technological Forecasting and Social Change, 112, 220-227. https://doi.org/10.1016/j.techfore.2016.05.027
