The Dynamic of Economic Growth, Manufacturing, FDI, and Carbon Emissions: A Vector Error Correction Model Analysis

Abstract

By increasing environmental issues related to climate change, there is a need for studying the impacts of economic growth, manufacturing, and foreign direct investments on carbon emissions in rapidly growing countries such as Indonesia. This paper studies the dynamic impacts of economic growth, manufacturing, FDI, and carbon emissions in the period of 1994-2023 using Vector Error Correction Model (VECM). Unit root, cointegration and Granger causality tests are used in this paper to investigate both equilibrium relationships and dynamic impacts. The findings of this paper show the existence of significant cointegration relationship among the variables. Economic growth negatively affects carbon emissions in both the short and long run, which shows that economic growth leads to better environmental conditions. On the other hand, manufacturing positively affects carbon emissions in both the short and long runs, and FDI has a positive effect on carbon emissions in both the periods, which suggests that the growth of industries and FDI is still being done in carbon-intensive sectors. These findings suggest that sustainable economic growth requires greening of industries and strict environmental policies.