Toward achieving sustainable development: Searching for economic development and globalization thresholds in the foreign direct investment‐environmental degradation nexus

Abstract

Abstract The need to reduce environmental degradation has led to the identification of several factors influencing environmental degradation, with the inflows of foreign direct investments (FDI) touted as a key factor. However, findings produced from the existing studies on FDI‐environmental degradation nexus are far from being conclusive, leaving policymakers under quandary regarding the precise effect of FDI on environmental degradation. We contribute to the FDI‐environmental degradation nexus debate by examining how economic development and globalization thresholds influences the role of FDI in environmental degradation in industrialized countries over the 1991–2016 period. We invoke a recently developed fixed effect panel threshold model estimation procedure that does not impose a prior functional form of the threshold. We find that FDI inflows mitigate environmental degradation when countries' levels of economic development and globalization are below the estimated thresholds. However, above the thresholds, higher FDI inflows significantly degrade the environment. Thus, unbridled economic development and globalization do not permit FDI to reduce environmental degradation.