Foreign investment and air pollution: Do good governance and technological innovation matter?

Abstract

This article examines how good governance and technological innovation complement foreign direct investment (FDI) to mitigate carbon emissions in twenty-three emerging economies for the period 1996-2014. Based on the Generalized Method of Moments (GMM) approach, we established the following results: First, from the non-interactive regressions, FDI inflows have positive effects on the four indicators of carbon emissions while increasing governance quality and technological innovation have negative effects on these indicators. Second, from the interactive regressions, the interactions between FDI and both political and institutional governance decrease the level of CO₂ emissions. Moreover, the interactions between technological innovation and FDI reduce CO₂ emissions in all the estimated models, except in the model pertaining to CO₂ emissions from electricity and heat production; as a result, environmental quality is improved. Policy implications and future research directions are also discussed.

Keywords: CO(2) emissions; Foreign investment; Good governance; Technological innovation.