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Impacts of Foreign Direct Investment and Economic Development on Carbon Dioxide Emissions Across Different Population Regimes

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Abstract

According to the Green Solow model, the rise or fall of emissions over time depends on a scale effect and a technique effect, and, if the latter effect is held constant, changes in population growth will influence profiles of the environmental Kuznets curve (EKC). Utilizing four alternative measures of population size as threshold variables, this paper reexamines the effect of foreign direct investment (FDI) on carbon dioxide (\(\hbox {CO}_{2}\)) emissions and further tests EKC profiles for different population sizes. Our threshold test shows a double-threshold effect on \(\hbox {CO}_{2}\) emissions, implying the existence of three population regimes: least, moderately, and most populated. Our results show that an inverted U-shaped EKC relationship exists between \(\hbox {CO}_{2}\) emissions and economic development across different population regimes, when population density and absolute population in turn are used as a threshold variable. In addition, in the least populated regime, \(\hbox {CO}_{2}\) emissions significantly converge with increasing FDI.

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Notes

  1. While Chang and Huang (2015) study test whether the threshold effect exists, and estimate how marginal effects of FDI and economic development on \(\hbox {CO}_{2}\) emissions differ across different population-density regimes, they did not study how population growth changes the effect of technological progress in abatement of emissions. In addition, they did not discuss and prove that if the level of technology is held constant, changes in population growth will influence profiles of EKC.

  2. Although Caner and Hansen (2004) developed a threshold regression with endogenous regressors, it is a cross-sectional estimation and cannot be applied to panel data (Aidt et al. 2008). Caner and Hansen (2004) model is substantially different from Hansen (1999) model. In addition, we make an assumption of exogeneity of regressors and threshold variables. Thus, our model requires a distinct estimator.

  3. Abatement has a positive but diminishing marginal impact on pollution reduction.

  4. If we use the disaggregated FDI to test the effects of disaggregated FDI on carbon dioxide (\(\hbox {CO}_{2}\)) emissions across various industries and countries data, we will suffer two problems. One is that the data for \(\hbox {CO}_{2}\) emissions of industries or disaggregated FDI of industries cannot both be obtained from all specific sample countries. The other is that one of our goals (e.g. to estimate how the marginal effects of FDI and economic development on \(\hbox {CO}_{2}\) emissions differ across regimes of varying population size in order to test the profile of the EKC) cannot be implemented if the disaggregated FDI is a proxy for technological progress. In addition, Baek and Koo (2009) also suggested that the inflow of foreign capital can result in technological change and the spillover of ideas across countries when capital is regarded as knowledge rather than as simply plant and equipment.

  5. Explanatory variables of environmental degradation do not consider cubic terms of GDP because the coefficient of cubic terms of GDP is not statistically significant in the linear or nonlinear regression.

  6. We want to delete the individual specific effects using Eq. (14) and then facilitate estimation of the slope parameters.

  7. This paper focus on this sample for three reasons. First, the countries under consideration have long time series of data available. Second, the period under consideration has the complete and available data. If the period goes back to 1980, some data cannot be obtained. Finally, to ensure a balanced panel, we choose the countries that have data for the period 1996–2005.

  8. Although Andrews (1993) and Andrews and Ploberger (1994) test statistics consider the problem of optimal testing when a nuisance parameter is unidentified under the null hypothesis, they do not discuss how critical values for the test statistic should be obtained. In addition, Hansen (1996) Sup-Wald test, which demonstrated that this test has near-optimal power against distant alternatives, is the dominant approach to test for nonlinearity and developed approximated asymptotically correct critical values.

  9. Advanced economies include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Greece, Hong Kong, Iceland, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

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Authors and Affiliations

  1. Department of Business Administration, National Formosa University, Huwei, Yunlin, 632, Taiwan

    Shu-Chen Chang

  2. Department of Industrial Management, National Formosa University, Huwei, Yunlin, 632, Taiwan

    Meng-Hua Li

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  1. Shu-Chen Chang
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Correspondence to Shu-Chen Chang.

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Chang, SC., Li, MH. Impacts of Foreign Direct Investment and Economic Development on Carbon Dioxide Emissions Across Different Population Regimes. Environ Resource Econ 72, 583–607 (2019). https://doi.org/10.1007/s10640-018-0216-1

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