Foreign direct investment, foreign aid, and CO2 emissions in Asian economies: does governance matter?

Abstract

Due to emanating global warming, all countries of the world are focusing on policy development regarding mitigation of environmental pollution. However, there exist multiple factors that interrupt such environmental protection actions both positively and negatively. Following this, this study aims to explore the dynamical impact of governance on the relationship between foreign direct investment, foreign aid, and CO2 emissions. We use the recent data covering the period of 2001–2019 of Asian economies and apply estimated generalized least square, two-stage least squares, system generalized method of moments, and fully modified ordinary least square models to estimate the regression. The implication of such models helps to quantify the unbiased regression by treating multiple econometric problems. The statistical outcomes of these models suggest that inflow of foreign direct investment (FDI) enhances the CO2 emissions due to more industrial proliferation. Conversely, foreign aid and governance mitigate the CO2 emissions as foreign aid promotes development of industrial technology which causes low CO2 emissions. Similarly, the better governance practices restrict the industrial sector from emitting of excessive CO2. However, receipts of foreign aid deteriorate the governance situations which further channelize the deprivation of government control on industrial sector regarding CO2 emissions. Conversely, FDI strengthens the governance situation which further permeates negative CO2 emissions. The findings of the study suggest that a country can impede the CO2 emissions caused by inflow of FDI via proper governance application. This study adds new thoughts regarding governance role to manage the externalities of FDI and foreign aid.