Do human capital and governance thresholds matter for the environmental impact of FDI? The evidence from MENA countries

This paper studies whether foreign direct investment (FDI)-CO₂ emissions relationship may change depending on the data-driven estimated threshold levels for the country characteristics (CC) including human capital and governance in a sample of 13 Middle East and North Africa (MENA) economies during the 1996-2019 period. Our results strongly suggest that endogenously estimated CC thresholds matter for the impact of FDI on CO₂ emissions. The pollution haven hypothesis, which maintains that FDI is associated with higher levels of pollution, appears to be valid for economies with weak CC. In addition to this, the pollution halo argument suggesting FDI lowers the emissions appears to be hold in countries with strong CC. The results in this study may indicate that policies aiming to improve human capital and governance may be expected not only to increase the economic benefits of FDI in terms of growth but also mitigate the negative environmental impacts of FDI in the MENA region.