The Nexus of Institutional Quality, Foreign Direct Investment, and Environmental Degradation: Evidence from Developing Economies

Abstract

This study examines the relationship between foreign direct investment (FDI), institutional quality, and environmental degradation in 50 developing countries from 1996 to 2024. Using a panel ARDL model, it distinguishes between short- and long-run effects on CO₂ emissions. The results strongly support the Pollution Haven Hypothesis (PHH). FDI, trade openness, and economic growth significantly increase emissions in the long run. In contrast, corruption control plays a key mitigating role. In the short run, the impact of FDI is limited, but causality tests reveal a one-way effect from FDI to emissions. This highlights the structural influence of foreign investment on environmental outcomes. Countries with weak governance are particularly vulnerable. Foreign capital often flows into pollution-intensive sectors. Strengthening institutions and promoting green FDI are essential for sustainable development.