The impact of foreign direct investment, institutional quality, and industrialization on carbon emissions: Evidence from high-income and upper-middle-income countries

Abstract

This study investigates the relationship between foreign direct investment (FDI), institutional quality, industrialization, and carbonemissions 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 negativeinfluence 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.