Can digital transformation and foreign direct investment enhance environmental quality? Evidence from selected developing countries

Abstract

Developing countries are heavily reliant on foreign direct investment (FDI) and digital transformation to sustain economic growth and improve productivity. However, these growth drivers may also intensify environmental pressure when they are supported by fossil-fuel-based energy systems. Consequently, the literature on the FDI-CO2 emissions remain inconclusive which necessitates further evidence. By employing an annual panel of 28 developing countries over the period 2000-2022, this study aims to comprehensively evaluate the main factors driving or mitigating CO2 emissions. Empirical results show that energy consumption is the most consistent driver of CO2 emissions. Meanwhile, FDI and digital transformation show positive but statistically insignificant effects in the baseline model, suggesting that their environmental impacts are contextdependent rather than uniform. Moreover, the robustness analysis indicates that renewable energy is negatively associated with CO2 emissions. Overall, the findings suggest that developing countries should place energy transition at the centre of sustainable development strategies. In particular, policymakers should improve energy efficiency, expand renewable energy, attract cleaner FDI and align digital transformation with low-carbon energy planning.