Foreign Direct Investment and Carbon Emission Accounting Efficiency the Moderating Role of Regulatory Quality

Abstract

The developing and emerging Asian nations are the main targets of foreign direct investment (FDI), and at the same time, they are having growing pressure to bring down their carbon emissions and achieve sustainable development. This double challenge poses an interesting policy dilemma: will FDI add to or detract from the efficiency of carbon emission accounting under various institutional environments? This study investigates whether FDI has an impact on the accounting efficiency of carbon emissions-CO₂ emission intensity per unit of economic output and whether regulatory quality makes a difference. A balanced panel data set of 25 developing/emerging Asian economies over the 2014–2023 period (250 country-year observations) was analyzed using a fixed-effect model with an interaction term and cross-sectionally dependent Driscoll–Kraay standard errors and a two-step System GMM estimator to address endogeneity. The empirical results show that FDI is significantly related to increasing the carbon emission intensity, lending support to the pollution haven hypothesis, and regulatory quality is significantly related to improving the carbon emission accounting efficiency. Furthermore, the relationship between FDI and the regulatory quality is found to be statistically significant, which indicates that the negative environmental impacts of FDI are reduced by the improvement of the regulatory quality. The threshold and country-group analyses also show that FDI is associated with better emission efficiencies only when the economy has a relatively high regulatory quality. The results in this study indicate that the improvement of regulatory institutions is crucial in the process of making foreign investment contribute to sustainable development and offer concrete policy suggestions on how to reconcile the economy and the environment in developing and emerging Asian economies.