Furthermore, the analysis demonstrates that increased energy use, foreign direct investment inflows, and agricultural growth stimulate CO2 emissionsand fine dust PM2.5, which in turn lea
OVERVIEW OF THE RESEARCH
Reasons for choosing the topic
The Chinese government's Belt and Road Initiative (BRI), launched in 2013, has garnered global attention due to its profound economic and environmental impacts on participating countries This ambitious project fosters strong economic cooperation among nations in Asia, Europe, and Africa, reminiscent of the historic Silk Road that once connected the East and West across various socioeconomic dimensions By developing extensive infrastructure and enhancing communication and transportation, the BRI aims to create a mutually beneficial economic environment for its partner countries Over the past five years, there has been a notable increase in the number of nations joining the Belt and Road Initiative.
In 2020, the Belt and Road Initiative (BRI) expanded to 138 countries, a significant increase from 91 in 2018, spanning five major continents (Chen et al 2020a, b; Coenen et al 2020) This growth underscores the BRI's aim to establish a global network that facilitates substantial transformations, ultimately accelerating economic development for its member nations.
The Belt and Road Initiative (BRI) encompasses member nations that represent over 50% of global productivity and approximately 70% of the world's population (World Bank, 2020) While the BRI may encounter opposition in the future, its successful implementation could position China and its partners as significant regional and global leaders The initiative aims to enhance trade and commerce by overcoming previous barriers faced by these countries (Chan et al., 2020) In line with this objective, the Chinese government has developed a comprehensive investment strategy to create economic corridors and improve infrastructure Notably, the total contract value under the BRI has surged by over 60% compared to the same period last year (MOFCOM).
The International Energy Agency reports that energy spending on Belt and Road Initiative (BRI) projects has more than doubled since 2014, with projections indicating that infrastructure investments in Asia-Pacific countries could reach approximately $23 trillion by 2030 It is estimated that around two-thirds of BRI investments are directed towards developing countries, aiming to boost their economic growth Additionally, the BRI has initiated over 7,000 development projects, primarily focused on power plants, transportation, and poverty alleviation These trends suggest a significant increase in energy consumption among BRI member countries in the coming years.
The Belt and Road Initiative (BRI) is anticipated to bring significant economic benefits; however, it may also lead to severe environmental challenges due to increased energy demand among member nations As more developing countries join the BRI, the reliance on fossil fuels for electricity generation—primarily gas, coal, and furnace oils—will likely exacerbate environmental issues Many emerging economies prioritize economic growth over environmental concerns in their globalization efforts, suggesting that all participating nations could face environmental repercussions from the BRI Previous studies have explored the relationship between energy economies and environmental impacts in developing countries, but findings remain inconclusive Additionally, there has been limited research on whether the BRI will promote sustainable growth in low- and middle-income member nations This study focuses on the "Impact of FDI on climate change in developing economies," analyzing the energy-economy-environment dynamics in 42 developing countries involved in the BRI, using annual data from 2000 to 2020.
Objectives of the study
The primary objective of this project is to investigate the influence of FD1 capital on climate change in developing economies involved in the Belt and Road Initiative To achieve this, the project outlines two specific goals aimed at assessing the environmental impact of investments in these regions.
First, consider the impact of FDI on climate change in developing economies under the BRI in the period 2000-2020.
Second, propose solutions drawn from research results to improve the efficiency of using FDI capital by governments and businesses for investment-receiving countries in developing economies under the BRI.
Therefore, the group proposed the research question: The correlation between FDI capital flows and climate change, specifically CO2 emissions and PM 2.5 dust.
Object and scope of the study
The topic focuses on researching FDI inflows, the cuiTent situation of climate change and the impact of FDI on climate change of developing economies under the BRI.
The topic focuses on researching FDI inflows, the current situation of climate change and the impact of FDI on climate change of developing economies under the BRI.
- Regarding research space: The research focuses on analyzing the impact of foreign direct investment on climate change in 42 developing economies under the BRI.
- Regarding research time: Research evaluation over a period of 21 years (2000 2020)
Research Methods
This study employs a diverse array of research methods, incorporating theoretical approaches such as analysis, synthesis, classification, and systematization It systematically analyzes and evaluates the correlation between variables using descriptive statistical methods based on the collected data Ultimately, the research utilizes quantitative analysis through econometric regression models to explore the relationship between foreign direct investment and climate change.
New contributions and significance of the topic
1.5.1 New contributions of the topic
While numerous studies have examined the effects of foreign direct investment (FDI) on the environment, there is a notable lack of research focusing on climate change in developing countries within the context of the Belt and Road Initiative, particularly using fixed effects regression models.
1.5.2 Scientific and practical significance of the topic
This research enhances the existing body of knowledge on the impact of Foreign Direct Investment (FDI) on global challenges, particularly by elucidating the link between FDI capital flows and climate change through statistical analysis and econometric modeling Consequently, this study serves as a valuable reference and provides a foundational framework for future research in this area.
This research provides valuable insights for governments and businesses on the environmental impacts of attracting Foreign Direct Investment (FDI) capital It also proposes policies to enhance FDI flows that align with climate and environmental objectives in developing economies under the Belt and Road Initiative Ultimately, this approach aims to foster economic development while addressing and mitigating the effects of climate change.
Structure of the topic
The structure of the research is divided into five chapters, specifically:
Chapter 1: Introducing and presenting an overview of the main contents of the thesis and the reasons for conducting this research topic
Chapter 2: Summary of fundamental theories applied in the research and a brief overview of the previous related research results.
Chapter 3: Explaining how to identify the variables included in the estimation and describing in detail how to collect sample data, describing the research sample, methodology, and explaining the reasons for choosing this research method.
Chapter 4: Presenting the research findings that have been achieved and discussing the research results.
Chapter 5: Presenting general conclusions of the thesis, stating new contributions and shortcomings of the topic, thereby proposing further research directions, and some policy implications in Vietnam.
THEORETICAL BASIS OF THE IMPACT OF FOREIGN DIRECT
Theories of foreign direct investment
2.1.1 The concept of foreign direct investment
Foreign Direct Investment (FDI) is defined by the International Monetary Fund (IMF, 1993) as an investment activity aimed at achieving long-term benefits in a business operating in a different economy than that of the investor The World Trade Organization (WTO, 1996) adds that FDI occurs when an investor from one country acquires assets in another country, gaining management rights over those assets This emphasis on management differentiates FDI from other financial investments, with the investor referred to as the "parent company" and the acquired assets as "subsidiaries."
Secondly, in terms of statistics, the Organization for Economic Cooperation and
Foreign Direct Investment (FDI) aims to create long-term economic relationships with enterprises, particularly through investments that enable investors to influence the management of these businesses (OECD, 2015).
(i) Establish or expand an enterprise or a branch under the full management of the investor;
(ii) Acquire all existing businesses;
(iii) Participate in a new business;
(iv) Provide long-term credit (over 5 years).
Foreign Direct Investment (FDI), as defined by the United Nations Conference on Trade and Development (UNCTAD, 2006), is a long-term investment strategy where a foreign direct investor or parent enterprise seeks to gain control and influence over an overseas branch in another country This investment aims to secure long-term benefits while enhancing the investor's management authority within the foreign business environment.
The concepts of the above organizations are basically consistent with each other regarding the relationship, role, interests of investors and time in FDI activities In short,
Foreign Direct Investment (FDI) refers to international investments where an investor from one country commits substantial capital to a project in another country, aiming to gain control or influence over it FDI capital flows are categorized into inflows of Foreign Direct Investment (IFDI), which are investments made by foreign investors in a host country, and outflows of Foreign Direct Investment (OFDI), which represent investments made by local investors in foreign markets.
2.1.2, Impact of foreign direct investment on the recipient country
2.1.2 J Positive impact of foreign direct investment on the recipient country
In today's globalized economy, Foreign Direct Investment (FDI) is a crucial component of the investment capital structure for nations worldwide, significantly contributing to their economic development Countries that receive such investments are particularly noteworthy for their role in fostering growth and attracting international capital.
Foreign Direct Investment (FDI) plays a crucial role in providing advanced technology to developing countries, serving as a key channel for the transfer of new technology and machinery Research by Hejazi and Safarian (1999) highlights the significance of FDI and multinational enterprises in facilitating access to modern science and technology Similarly, Makki and Somwaru (2004) emphasize that FDI is often the primary means through which advanced technologies reach developing nations This influx of technology not only reduces production costs but also enhances the global competitiveness of these countries.
Foreign-invested businesses significantly enhance workers' opportunities for skill and knowledge development Their transnational structure and extensive operations create a conducive environment for employee growth According to Slaughter (2002), there is a strong positive correlation between the presence of US-invested businesses and the improvement of labor skills in developing countries.
Foreign Direct Investment (FDI) plays a crucial role in assisting developing countries to address long-term capital shortages, thereby fostering economic growth By boosting budget revenues through taxes, acquiring struggling companies, and enhancing job creation, FDI significantly elevates a nation's output and productivity This surge in economic activity not only strengthens infrastructure but also promotes social development, leading to a more balanced improvement across various sectors.
2.1.2.2 Negative impact of foreign direct investment on the recipient country
Foreign Direct Investment (FDI) inflows, while beneficial, also present challenges for recipient countries, particularly concerning profit repatriation Multinational companies aim to maximize profits by leveraging advantages in host countries, such as low labor costs and favorable FDI policies This often results in significant profit transfers back to their parent companies, which can occur through dividends or retained earnings, allowing them to minimize tax liabilities in the host nation Research by Eicke, R (2009) indicates that such repatriation can lead to substantial capital outflows, adversely impacting the balance of payments in the recipient country To mitigate these effects and protect foreign exchange reserves, host countries frequently impose restrictions on the amount of profits that can be repatriated.
Foreign Direct Investment (FDI) enterprises often dominate local markets due to superior product quality, profit efficiency, and better access to financial resources, as noted by Monissey and Udomkerdmongkol (2012) This dominance in developing countries can create parallel economies, where foreign enterprises control developed sectors, resulting in capital intensiveness, while domestic enterprises manage underdeveloped, labor-intensive sectors Consequently, this parallel economy can impede overall economic growth, as a significant portion of the population remains engaged in underdeveloped industries This phenomenon is particularly evident in oil-rich nations, where foreign investments primarily target the oil and gas sector, leading to a resource boom and neglecting agriculture and manufacturing.
Finally, FDI inflows can also lead to environmental pollution in the recipient country according to the Hidden Pollution Hypothesis presented in section 2.1.3 of this study.
2.1.3 Reasons for forming foreign direct investment
Foreign direct investment can be formed due to three factors: differences in the marginal productivity of capital between countries, product cycles and special advantages of multinational companies.
Research by Helpman Elhanan (2006) and Richard S Eckaus (2006) highlights that differences in the marginal productivity of capital between countries drive foreign direct investment (FDI) Marginal productivity refers to the additional output generated from using one more unit of production factor Typically, capital-abundant countries exhibit lower marginal productivity, while capital-deficient countries show higher marginal productivity This disparity prompts capital to flow from surplus to scarcity regions to maximize profits, as production costs are often lower in capital-scarce countries However, it's essential to note that businesses may still engage in activities with low marginal productivity, as these functions are crucial to their overall operations.
The product cycle significantly influences foreign direct investment (FDI), encompassing three key stages: new product, mature product, and standardized product According to Akamatsu Kaname (1962), new products are initially developed and produced in the investing country before being exported As demand for these products grows in the importing country, local production begins, often relying on foreign capital and technology during the mature product stage Once domestic demand saturates, the focus shifts back to exports in the standardized product stage Raymond Vernon (1966) notes that at this stage, numerous suppliers emerge, leading to intense competition and price reductions, prompting manufacturers to relocate production to countries with lower costs This cyclical process ultimately drives the formation of FDI.
Finally, the advantages of multinational companies are also a reason for FDI formation Stephen H Hymes (1960, published in 1976), John H Dunning (1981), Rugman A A
In 1987, it was highlighted that multinational companies possess distinct advantages that enable them to navigate economic challenges and invest directly in foreign markets These advantages include large-scale operations, strong branding, and comprehensive management systems When selecting investment locations, these companies prioritize areas with favorable labor, land, and political conditions to leverage their strengths effectively Additionally, multinational firms with significant capital and technological resources are inclined to invest in countries that offer low raw material and labor costs, as well as promising consumer markets.
Theories of climate change
Climate change, as defined by the Intergovernmental Panel on Climate Change (IPCC, 2018), involves long-term alterations in climate patterns, measurable through statistical analysis of climatic characteristics The United Nations Framework Convention on Climate Change (UNFCCC) further clarifies that climate change can be attributed to human activities that modify the global atmospheric composition, alongside natural climate variability A significant consequence of climate change is the approximate 1.5 degrees Celsius increase in the Earth's average temperature since the pre-industrial era, leading to more frequent heat waves, extended hot seasons, and shorter cold seasons The IPCC also indicates that climate change has widespread impacts across all regions of the Earth.
Firstly,climate change accelerates the water cycle, causing prolonged Hoods or severe droughts in many different territories.
Secondly, climate change affects rainfall At high latitudes, precipitation may increase
Meanwhile, in the subtropics, rainfall is forecasted to decrease sharply Expected changes to monsoon rainfall varied by region.
Climate change will lead to rising sea levels throughout the 21st century, resulting in increased flooding in low-lying regions and accelerated coastal erosion By the century's end, extreme sea level events that once happened every century are expected to occur annually.
Fourthly, global warming accelerates the melting of permafrost, causing seasonal loss of snow cover and summer Arctic sea ice, melting glaciers and ice sheets.
Climate change is leading to significant alterations in ocean conditions, such as rising temperatures, ocean acidification, and decreasing oxygen levels These environmental shifts have profound effects on marine ecosystems and the communities that depend on them, with these impacts expected to persist for the remainder of the century.
Climate change poses significant challenges for urban areas, leading to intensified heat due to the urban heat island effect, increased flooding from heavy rainfall, and rising sea levels threatening coastal cities.
Addressing the serious impacts of climate change necessitates urgent action from governments, organizations, and individuals worldwide to identify its causes and implement swift solutions to mitigate and slow down this pressing issue.
2.2.2 Main causes of climate change
Geological studies over millions of years indicate that climate change has historically been driven by natural factors such as solar variations, volcanic activity, and shifts in Earth's orbit, as well as fluctuations in atmospheric CO2 levels However, the Intergovernmental Panel on Climate Change (IPCC) highlights the significant role of human influence in current climate dynamics.
Research from 2014 indicates that various sectors in the country, including transportation, agriculture, and construction, have significantly contributed to greenhouse gas emissions, which are driving global warming and altering the climate system Specifically, fossil fuel combustion in the energy and industrial sectors is responsible for 46% of global warming, while deforestation contributes approximately 18% Additionally, the agricultural sector accounts for around 9%, the chemical production sector for 24%, and other human activities make up the remaining 3%.
The combustion of fossil fuels such as coal, petroleum, natural gas, oil shale, asphalt, and tar sands releases greenhouse gases, including carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), chlorofluorocarbons (CFCs), and hydrochlorofluorocarbons (HCFCs) Among these, carbon dioxide constitutes approximately 9-26% of the total emissions, ranking just behind water vapor in terms of prevalence.
The greenhouse effect, comprising both natural and anthropogenic components, plays a crucial role in regulating Earth's temperature The natural greenhouse effect occurs when the sun's short-wave radiation reaches the Earth's surface and is reflected back as long-wave thermal radiation Key atmospheric molecules, such as CO2 and water vapor, absorb this thermal radiation, helping to retain heat Without this effect, Earth's average temperature would plummet to approximately -15 °C However, increased emissions from energy consumption have disrupted the balance between the natural greenhouse effect and solar radiation, leading to the anthropogenic greenhouse effect According to NOAA (2017), the global atmospheric CO2 concentration reached 412.5 parts per million at the end of 2020, marking a 29% increase.
Since the pre-industrial period of 1750, atmospheric CO2 concentrations have risen by 49%, with a significant acceleration noted in the 1960s, where the annual increase was approximately 0.6 ± 0.1 ppm This rate surged to 2.3 ppm per year between 2009 and 2018, exacerbating global warming Consequently, the Earth's average temperature has risen by about 1.5 degrees Celsius compared to pre-industrial levels, highlighting the urgent need to address rising CO2 emissions.
2.2.3 Methods of measuring climate change
The World Meteorological Organization (WMO) identified six key indicators for assessing climate change: global average surface temperature, ocean heat increase, atmospheric CO2 concentration, global mean sea level, changes in the cryosphere's extent and volume, and global precipitation Among these, greenhouse gas concentration is particularly significant as it directly influences the energy trapped in the Earth’s atmosphere, making it a crucial metric for reflecting climate change Historically, the UNFCCC utilized a composite index that aggregated the concentrations of all greenhouse gases.
The concentration of greenhouse gases such as CO2, methane, nitrous oxide, and HCFCs is often expressed in terms of CO2 equivalent using the Global Warming Potential (GWP) over a 100-year horizon GWP quantifies the relative impact of each gas, indicating how much warming one ton of a specific gas will cause compared to one ton of CO2 However, the applicability of GWP has been debated, as the effects of different gases vary over time; for instance, methane has a significant short-term impact but diminishes over decades, whereas CO2 exerts a prolonged influence over centuries Given that CO2 is the most prevalent greenhouse gas emitted by human activities and a primary focus of emissions reduction strategies, experts advocate for using annual CO2 emissions as a key indicator for climate change assessments.
Recent studies predominantly utilize the CO2 emission index to examine climate change trends both regionally and globally Alongside CO2 levels, fine dust PM2.5 has emerged as a significant indicator of climate change impacts Research by Huang et al (2021) indicates that climate change negatively affects air quality, leading to elevated PM2.5 concentrations due to altered rainfall patterns and increased pollutants, which trigger various chemical reactions in the atmosphere The rise in PM2.5 levels as a result of climate change poses a serious threat, with a projected surge in deaths and respiratory failures linked to PM2.5 exposure across many regions worldwide.
The PM2.5 index serves as a crucial indicator of the health risks associated with climate change Utilizing this index to inform policy decisions is essential for mitigating the severe health impacts linked to environmental changes, highlighting its significance in today's context.
The impact of foreign direct investment on climate change
As global capital flows continue to expand, the environmental effects of foreign direct investment (FDI) have garnered significant scholarly attention Recent studies examine the relationship between FDI and the environment through two main hypotheses: the Pollution Haven Hypothesis, which suggests that FDI may lead to increased pollution in countries with lax environmental regulations, and the Halo Effects Hypothesis, which posits that FDI can promote environmental improvements through the introduction of cleaner technologies and practices.
The Pollution Haven Hypothesis, introduced by Copeland and Taylor in 1994, suggests that trade liberalization encourages polluting industries to relocate from developed to developing countries While this shift can attract foreign direct investment (FDI), it also poses significant environmental risks for these nations.
Research by Hoffman et al (2005) indicates that the hypothesis regarding environmental regulation compliance primarily applies to low- and middle-income countries This is largely due to multinational companies' efforts to reduce costs associated with environmental regulations in developed nations, such as environmental taxes and compliance delays In contrast, developing countries often lack robust regulatory frameworks, resulting in insufficient enforcement of environmental laws and sanctions Additionally, discrepancies in tax rates and penalties for pollution create economic incentives for multinational corporations Xing and Kolstad (2002) further highlight that governments in developing nations may lower standards and relax regulations to attract foreign direct investment (FDI), which exacerbates emissions in these regions.
The "Pollution Haven" hypothesis is supported by various studies highlighting its impact on developing countries For instance, Lagos and Valasco (1999) found that foreign companies in Chile's mining sector often neglected environmental policies due to an underdeveloped legal framework Similarly, Javorcik and Wei (2001) showed that transitioning economies with stricter environmental standards attract less investment from pollution-causing multinationals Research by Zakarya et al (2015) indicated that foreign direct investment (FDI) in BRICS countries correlates with increased CO2 emissions Kostakis et al (2017) identified pollution haven sites in Brazil while examining Singapore and Brazil In contrast, the hypothesis is less applicable in developed nations, where strict regulations and consumer demand for eco-friendly products prevail Kirkpatrick and Shimamoto (2008) demonstrated that Japan's transparent environmental regulations attract FDI, emphasizing that a robust legal framework significantly influences foreign investors more than lax environmental policies.
The Halo Effect Hypothesis complements the Pollution Haven Hypothesis by examining the positive impact of foreign direct investment (FDI) on the environment This hypothesis posits that multinational corporations enhance resource efficiency and address environmental pollution in host countries while fostering the development of environmental protection technologies through knowledge and technology transfer Consequently, investments from transnational corporations (TNCs) not only drive economic growth and technological advancement in recipient nations but also aid in mitigating environmental issues Zarsky (1999) supports this view, suggesting that FDI facilitates the dissemination of green technologies and the implementation of higher environmental standards, ultimately leading to significant improvements in both industrial output and environmental quality in the host country.
A study conducted in 2013 examined the "Pollution Haven" and "Halo effect" hypotheses by analyzing the relationship between carbon emissions and foreign direct investment (FDI) inflows in seven MENA countries from 1980 to 2011 The findings revealed that FDI inflows significantly correlate with a reduction in CO2 emissions, thereby supporting the "Halo effect" hypothesis.
Marques and Caetano (2020) examined the link between foreign direct investment (FDI) and environmental emissions across 21 countries, categorized by income levels, from 2001 to 2017 using the ARDL method Their findings indicate that high-income countries experience a reduction in CO2 emissions due to FDI, benefiting both in the short and long term Similarly, Shao (2018) analyzed the effects of FDI on carbon emissions across 188 countries from 1990 to 2013 using the GMM estimation method, supporting the "Halo effect" hypothesis in high-income nations This phenomenon occurs because these countries prioritize the quality of FDI over the quantity, leading foreign investors to introduce advanced technology and implement stringent emission control systems, thereby mitigating resource overuse and environmental degradation.
In conclusion, research on the two hypotheses indicates that foreign direct investment (FDI) can either benefit or harm the environment of the host country The effects of FDI are influenced by the chosen research methodology, time period, and geographic area of the study.
Overview of related literature
The rapid growth of technology and foreign direct investment (FDI) has led to significant environmental contamination, prompting researchers to explore the relationship between FDI and various environmental factors, including CO2 levels and PM2.5 emissions Their studies aim to determine how fluctuations in FDI impact environmental health By collaborating with state organizations and global associations, academic researchers seek to develop effective solutions that align with sustainability criteria in today's modern era.
Research indicates a complex relationship between foreign direct investment (FDI) and environmental factors in both developing and developed nations, as highlighted by studies from Xuhua Hu et al (2020) and António Cardoso Marques and Rafaela Caetano (2020) Despite various theories and discussions, experts have yet to reach a definitive conclusion on this issue.
The Environmental Kuznets Curve (EKC) theory posits a U-shaped relationship between environmental factors and economic growth, indicating that economic development initially leads to increased pollution before environmental conditions improve (Xuhua Hu et al., 2020) Additionally, the "pollution haven" hypothesis suggests that countries with lax environmental regulations attract foreign direct investment (FDI) in polluting industries, as evidenced by Xing and Kolstad's (1998) findings linking U.S FDI to higher sulfur emissions in host nations However, this theory lacks robust support, as demonstrated by Eskeland and Harrison's (2003) analysis of FDI distribution across various industries in Mexico, Venezuela, Morocco, and Côte d'Ivoire.
Some research supports the idea that foreign direct investment (FDI) favorably influences environmental pollution by raising emissions, usually in the following ways:
A study by Antonio Cardoso Marques and Rafaela Caetano (2020) examined the effects of foreign direct investment (FDI) on air pollution emissions in 21 countries, classified by income levels The findings revealed that FDI impacts middle-income and high-income nations differently, indicating that these countries face a trade-off between meeting pollution reduction targets and attracting FDI Policymakers can gain crucial insights from this research to balance environmental preservation with economic growth through foreign direct investment.
Usman Mehmood, Salman Tariq, and Zia ul Haq (2021) conducted a significant study exploring the relationship between CO2 emissions and population structures, employing country-specific analytical methods Their research contributes valuable statistical insights for Pakistan, India, Bangladesh, and Nepal, enhancing the existing literature on this critical environmental issue The study utilizes the most recent annual data available, providing a comprehensive understanding of the dynamics at play in these countries.
Between 1990 and 2016, research indicates that urbanization, population growth, and GDP per capita positively influence carbon dioxide emissions (WDI 2019) While this study contributes valuable insights, it also highlights gaps that warrant further investigation Future research should incorporate additional indicators of environmental degradation using the latest data, as this study primarily focused on CO2 emissions as a key factor in environmental deterioration.
In their 2019 analysis, Muhammad All Nasira, Toan Luu Duc Huynh, and Huong Thi Xuan Tram examined the environmental impacts of financial development, foreign direct investment (FDI), and economic growth in ASEAN countries from 1982 to 2014, utilizing DOLS and FMOLS methodologies They found that economic expansion and increased FDI contribute to environmental degradation in these nations The study concludes that ASEAN countries may face unforeseen ecological challenges due to rapid economic growth and FDI Therefore, it is essential to prioritize sustainable economic growth by directing resources towards environmentally friendly sectors, particularly in alignment with the Sustainable Development Goals (SDGs).
A study by Sujan Chandra Paul et al (2021) analyzed the impact of foreign direct investment (FDI) on greenhouse gas emissions, including CO2, CH4, and N2O, across 200 countries over 29 years (1990-2018) using various models such as POLS, GMM, and 2SLS The findings revealed a positive correlation between FDI and greenhouse gas emissions As energy consumption increases with economic growth, developing nations must explore alternative energy sources to mitigate environmental damage Utilizing natural gas, biomass, and green technologies can significantly contribute to reducing CO2 emissions.
Jungho Baek's 2016 study utilized the PMG estimator of dynamic panels to explore the impact of foreign direct investment (FDI), wealth, and energy consumption on CO2 emissions in five ASEAN nations The findings indicated that an increase in FDI correlates with a rise in CO2 emissions Furthermore, Baek recommended that to maintain their current economic growth while reducing CO2 emissions and pollution, these ASEAN countries should consider adopting alternative energy sources.
Olugbenga A Onafowora and Oluwole Owoye conducted a study analyzing CO2 emissions per capita in Brazil, China, Egypt, Japan, South Korea, Mexico, Nigeria, and South Africa over a 40-year period from 1970 to 2010, using the ADRL model Their findings revealed that energy consumption and income growth are key drivers of increased CO2 emissions in these countries They recommend that governments proactively implement national strategies to mitigate resource depletion and environmental degradation, rather than postponing action until economic growth has been achieved.
Jiang et al (2020) explore the relationship between inflow foreign direct investment (IFDI), outflow foreign direct investment (OFDI), and their interactive variable in China from 2017 to 2020 Their findings reveal that IFDI and OFDI have opposing effects on CO2 emissions; specifically, an increase in OFDI is associated with a decrease in CO2 emissions, while IFDI contributes positively to CO2 emissions Interestingly, despite these contrasting influences, the interaction between IFDI and OFDI leads to an overall increase in CO2 emissions.
Research indicates that foreign direct investment (FDI) improves air quality in host countries, positively impacting the environment This is evidenced by the observed inverse relationship between FDI and emissions of CO2 and PM 2.5, suggesting that increased investment leads to lower pollution levels.
Eric Evans Osei Opoku et al have done a study related to the relationship between FD1 and environmental factors, especially the CO2 emissions in 22 countries from 1995 to
The GMM model from 2014 indicates a significant negative relationship between foreign direct investment (FDI) and CO2 emissions, suggesting that as FDI flows increase, environmental degradation decreases The impact on CO2 emissions varies by region, supporting the pollution halo theory, which posits that FDI has minimal effects on emissions To protect the environment while attracting FDI, the authors recommend that governments and authorities develop more appealing packages that incorporate green technology.
Yanmin Shao's analysis of data from 188 countries between 1990 and 2013 reveals that foreign direct investment (FDI) significantly negatively affects carbon intensity in host countries The findings suggest that policymakers should prioritize reducing fossil fuel consumption and optimizing industrial activities to mitigate environmental impacts across all nations studied.
Rafique et al (2020) analyze the influence of financial development, innovation in technology, and FDI on CO2 emissions in BRICS countries Based on the findings of
AMG and FMOLS highlight the significant negative effects of financial development, technological innovation, and foreign direct investment on carbon emissions They recommend that governments implement regulations requiring foreign investment firms to guarantee the adoption of environmentally sustainable technologies Additionally, they emphasize the need for a transition in energy development initiatives from non-renewable to renewable energy sources to reduce carbon footprints.
Analytical framework and research hypotheses
The project anticipates that foreign direct investment (FDI) will influence climate change through four key factors outlined in the analytical framework Additionally, we have incorporated economic growth indicators, including trade openness and GDP, along with urbanization levels and population ratios, due to their significant correlation with climate change, as evidenced by numerous studies referenced in Chapter 2.
Recent studies have examined the effects of foreign direct investment on climate change in developing countries, highlighting the significance of agricultural development factors As these nations undergo structural transformation from agriculture to industry and services, their economic structures remain heavily influenced by agriculture Consequently, to comprehensively assess economic growth in developing economies, it is essential to incorporate the agricultural development factor into the analytical framework.
Research indicates that technological innovation significantly influences the connection between foreign investment and CO2 emissions The Halo Effect Hypothesis highlights the importance of technological factors in reinforcing this relationship.
Research models examining the impact of foreign direct investment (FDI) on climate change highlight various contributing factors Key elements include economic factors such as FDI capital, GDP growth, and trade openness, alongside urbanization indicators like population density, labor force participation, and the extent of urbanization Additionally, technological advancements and agricultural development play significant roles in influencing climate change This article proposes hypotheses related to these essential components.
The impact of Foreign Direct Investment (FDI) on climate change has yielded conflicting results in previous studies, with its effect on CO2 emissions being both positive and negative depending on various factors such as research methodology and regional context (Shahbaz et al., 2018) Nonetheless, most studies suggest a positive correlation between FDI and CO2 emissions across different countries Research by Zeng and Eastin (2012) indicates that FDI from less developed countries (LDCs) can enhance the environmental practices of host-country firms instead of perpetuating harmful practices Furthermore, Weimin et al (2021) found that a decline in innovation processes is linked to increased carbon emissions Additionally, Wajdi Bardi and Mohamed All Hfaiedh (2021) identified that certain investments in 12 MENA countries are associated with pollution Based on these insights, we propose our first hypothesis.
Assumption 1: foreign direct investment and CO2/PM2.5 have the positive relationship
Several academics have examined the connection between economic growth and environmental degradation by analyzing variables such as real GDP, GDP growth, GDP per capita, and total CO2 emissions, highlighting a significant relationship that many people have observed.
The relationship between GDP and CO2 emissions presents conflicting outcomes, often illustrated by various studies Some researchers, such as Shahbaz et al (2018) and Apergis et al (2017), support the Environmental Kuznets Curve (EKC) hypothesis, which suggests an inverted U-shape relationship Conversely, Onafowora and Owoye challenge this hypothesis Research by Aslan et al (2021) indicates a bidirectional causal relationship between GDP and CO2 emissions in Mediterranean countries Additionally, Chaabouni and Saidi (2017) analyzed annual data from 51 nations between 1995 and 2013, revealing a bidirectional link between GDP per capita and CO2 emissions Wang (2013) utilized ECM methodologies for 138 countries from 1971 to 2007, supporting the feedback theory Meanwhile, Saboori et al (2012) employed ARDL and VECM methodologies on Malaysian data from 1980 to 2009, demonstrating a neutral relationship between economic growth and CO2 emissions.
Numerous studies have utilized PM 2.5 levels to examine the correlation between economic growth (GDP) and environmental pollution (Yan et al., 2020) However, findings regarding the influence of GDP on PM 2.5 remain inconsistent Overall, empirical research has produced varied outcomes concerning the relationship between economic growth and environmental pollution This study aligns with the majority of prior research, indicating that GDP may contribute to increased CO2 and PM 2.5 emissions Consequently, the author presents the following hypothesis.
Assumption 2: GDP and CO2/PM2.5 have the positive relationship
Research indicates that increasing populations significantly contribute to higher carbon emissions (Kumaran et al., 2021) Migration plays a pivotal role in population growth (Stephenson et al., 2010), which in turn exacerbates climate change and CO2 emissions in urban areas globally The inclusion of the population (POP) variable in this study highlights its macroeconomic importance, linking it to factors such as family planning and urbanization that influence environmental outcomes (Cohen, 2010) This suggests that environmental management systems in these countries are often inadequate Furthermore, Sulaiman and Rahim (2018) found that in Nigeria, population size has an insignificant impact on CO2 emissions when analyzed through DOLS and FMOLS models Overall, this presents an assumption that larger populations generally lead to increased average CO2 emissions in the environment.
Assumption 3: population and CO2/PM2.5 have the positive relationship
Urbanization significantly impacts environmental degradation, as evidenced by various studies with differing results Anwar et al (2021) analyzed the relationship between urbanization, renewable energy use, financial development, agriculture, and economic growth on CO2 emissions in 15 Asian countries from 1990 to 2014, concluding that urbanization positively influences CO2 emissions, while finance and economic growth contribute to their increase Similarly, Adebayo et al (2021) investigated the effects of urbanization, economic growth, energy consumption, and financial development on CO2 emissions in Latin American countries using data from 1980 to 2017 Their findings, derived from FMOLS and DOLS estimations, revealed a positive correlation between CO2 emissions and urbanization, economic growth, and energy consumption.
Research from 2021 reveals a U-shaped relationship between the size of a city and CO2 emission rates, alongside an inverted U-shaped effect of urbanization and urban agglomeration Over time, urbanization and urban agglomeration tend to improve environmental quality, supporting the concept of ecological modernization While some studies indicate a non-linear relationship between urbanization and CO2 emissions, others highlight that the impact of urbanization on environmental pollution varies based on economic growth and wealth levels Furthermore, research has shown a strong correlation between urbanization and PM2.5 emissions, with some theories suggesting an N- or U-shaped relationship Recent findings indicate that mass migration can influence emissions, as migrants in China tend to use cleaner fuels, leading to reduced emissions in some areas, although megacities like Beijing and Shanghai experience increased PM2.5 exposure due to high immigrant populations Despite uncertainties regarding the cause-and-effect dynamics between urbanization and energy demand, most studies have established a link between urbanization rates and emissions of CO2 and PM2.5, suggesting that urbanization plays a significant role in climate change.
Assumption 4: urbanization and CO2/PM2.5 have the positive relationship
(5) High and medium technological levels in the industrial sector (MHTI)
Wang et al (2021) provide evidence from Chinese province-level data indicating that foreign direct investment (FDI) and technological innovation play a crucial role in reducing CO2 emissions in high-tech industries They identify industrialization and urbanization as key contributors to CO2 emissions across various provinces in China Despite facing intense global competition, China's economy has thrived due to advancements in technology The authors advocate for government support in fostering technical initiatives that align with environmentally and socially responsible practices, emphasizing the establishment of green criteria for innovations aimed at enhancing environmental efficiency Their findings suggest that medium and high-tech industries, in conjunction with FDI, can synergistically influence CO2 emissions, with lower pollution levels anticipated in high- and medium-tech manufacturing compared to low-tech sectors (Avenyo and Tregenna, 2021; Qian et al., 2022) This research underscores the significant implications of their model on climate change.
Assumption 5: medium, high technological industries and CO2/PM2.5 have the positive relationship
The unemployment rate negatively impacts per capita carbon dioxide emissions, with a 1% increase leading to a reduction of 0.010% While this effect is not statistically significant, it aligns with findings by Adesina and Mwamba (2019) Moreover, Wang and Li (2021) highlight a significant inhibitory effect of the unemployment rate on emissions, and Granados and Spash (2019) report that a one percentage point rise in the stale unemployment rate correlates with a 1.06% decrease in emissions To further investigate the relationship between unemployment and CO2 emissions, as well as PM2.5 dust levels, the authors propose an assumption for analysis.
Assumption 6: unemployment rate and CO2/PM2.5 have the negative relationship
(7) Scale of agriculture, forestry and fishery industry (AGR)
Current research presents two main viewpoints regarding the relationship between agricultural development and environmental contamination A study by Zhahoor (2018) analyzed time series data from 1966 to 2014, revealing no significant correlation between CO2 emissions and agricultural production in Pakistan, both in the short and long term The Granger causality test further indicated that there is no unidirectional causal relationship between agricultural performance (AGP) and CO2 emissions Additionally, findings by Anwar et al (2021) suggest that the impact of agriculture on CO2 emissions is minimal.
Incorporating agricultural development is essential, as forestry, fisheries, and agriculture remain significant industries in emerging countries Additionally, wet rice civilization continues to be a vital aspect of life in the Asian nations under investigation Therefore, this leads to the following assumption.
Assumption 7: Scale of agriculture, forestry and fishery industry and CO2/PM2.5 have the negative relationship
METHODOLOGY OF RESEARCH
Research process
In the process of implementing research on the impact of FDI on climate change in developing economies in BRI, the authors followed the following order:
Firstly, conduct a review of concepts, theories, research issues, identify research gaps and conduct research on climate change and the impacts of FDI capital flows on this issue.
Second, based on the results of the literature review, the authors build an analytical framework and theoretical research model.
The authors gathered and processed data to create comprehensive tables, providing a descriptive statistical overview of the research problem They conducted various tests related to empirical models and regression analysis Throughout the research, STATA17 software was utilized to analyze descriptive statistics and econometric models effectively.
The authors present estimated results from their project, which employs descriptive statistics to analyze variables and assess correlations, providing insights into the impact of Foreign Direct Investment (FDI) on climate change in developing economies within the Belt and Road Initiative (BRI) Utilizing an Ordinary Least Squares (OLS) regression model, the study quantifies the effects of FDI inflows on climate change while addressing multicollinearity, autocorrelation, and heteroskedasticity through appropriate testing methods The findings lead to discussions on potential solutions and recommendations, along with policy implications, while also acknowledging the limitations of the research and suggesting directions for future studies.
The research process is summarized as shown below:
Research methodology
We compare three model running methods: Pooled OLS, FEM, REM to choose the most suitable model for panel data:
- (1) Least squares regression method (Pooled OLS)
Pooled OLS is a basic model that overlooks variations among research companies, but its main drawback is the tendency to combine features into random errors This can cause these errors to correlate with the independent variable, violating the assumptions of classical linear regression Consequently, the estimates produced by this model can be biased and unstable, which is why it is infrequently utilized in practice.
- (2) Fixed effects regression method (Fixed effects model_FEM)
Developed further from Pooled OLS when adding differences in companies, and there is a correlation between the residuals and the independent variables of the model.
- (3) Random effects regression method (Random effects model-REM)
Like the fixed effects model FEM, REM talks about differences between companies but does not show the relationship between residuals and independent variables of the model.
Shows the significance level of fixed effects of firm characteristics.
HO: There are no differences in individual characteristics between companies (Choose the Pooled OLS model).
Hl: There are differences in individual characteristics between companies (Choose FEM).
If F-statistic < F: Reject HO, or in other words, should use the fixed effects model (FEM).
If F-statistic > F: Accept HO, or in other words, should use Pooled OLS model.
HO: There is no correlation between the individual error components £1 and the independent regressors X.
Hl: There is a correlation between the individual error components £1 and the independent regression variables X.
If Prob < 0.01; 0.05; and 0.1: Reject HO (1%, 5% and 10% significance levels, respectively), FEM will give belter estimation results than REM.
If Prob > 0.01; 0.05; and 0.1: Accept HO (1%, 5% and 10% significance levels, respectively), REM will give better estimation results than the FEM.
LnCO2it = a + p2lnFDIit + p3lnGDPit + p4lnP0Pit 4- pslnAGRi t +
06lnMHTIit + 07lnRECiit + psLFOiit + ^TRADEi)t + PwURBit + P^UTL^ + Eiit
LnPM2.5iit = a + p2lnFDIit + p3lnGDPit + 04lnPOPi)t + pslnAGRi)t +
PỏlnMHTIị Ị- + p7lnRECi t + pQLFOit + pgTRADEi't + p10URBit + ^ỵUTLịỊ- + Sịt
Our regression model is inherited from Shakib's (2021) model.
Table 3.1 : Declaration of variables in the model
Variables Explanation and formula Expected relationship
The natural logarithm of all CO2 emissions is used as a representative variable to assess climate change; in the metric system, the unit is million tons.
The PM 2.5 fine dust emissions serve as a representative variable to monitor climate change The unit of measurement is micrograms per cubic meter.
The natural logarithm of net foreign direct investment capital inflows is utilized to assess the magnitude of these inflows, measured in US dollars based on the exchange rate for 2024.
The gross domestic product growth rate, computed as the natural logarithm of the total gross domestic product growth in the nation unit is percentage
Population size measured as the natural logarithm of the entire country's population, expressed in terms of individuals.
Agriculture, forestry and fishery industry, measured as the natural logarithm of the ratio of the industry's added value to gross domestic product, expressed in percentage terms
The scale of medium and high technology industries is determined by the natural logarithm of their added value relative to the total added value of the manufacturing sector, expressed as a percentage.
Renewable energy consumption is measured by the natural logarithm of renewable energy consumption to total energy consumption, expressed in percentage terms
The percentage of people over 15 to 64 who are
Source: Author's synthetic employed, measured in labor force size, is expressed in percentage terms.
TRADE trade ratio,the gross domestic product divided by the entire amount of goods and services exported and imported, expressed as a percentage.
The percentage units used to determine the urbanization scale are the ratio of the national population to that of the urban population.
The percentage of the labor force that is unemployed is known as the unemployment rate.
This research analyzes data from 37 developing countries involved in the Belt and Road Initiative (BRI), having originally included 42 nations but excluding those with unavailable data The study specifically investigates the interrelationship among energy, economy, and environment in these developing BRI member countries, intentionally leaving out high-income BRI nations and small island states.
Data for the analysis of the 37 Belt and Road Initiative (BRI) nations from 2000 to 2022 were obtained from the World Bank's World Development Indicators (WDI) database The study employs an empirical model where CO2 emissions per capita serve as the dependent variable, while independent variables include population, foreign direct investment (FDI) inflows, the added value of medium and high-tech manufacturing industries, the value added from agriculture, forestry, and fisheries, the proportion of renewable energy consumption in total energy use, GDP per capita, trade openness, workforce size, urbanization, and the unemployment rate.
Table 3.2 : The list of 42 BRI-associated countries from the lower, upper-middle and upper-middle income group
No of No of middle No of countries Low income countries income countries Upper middle income