Foreign Direct Investments and Environmental Quality in Sub-Sahara Africa: The Merits of Policy and Institutions for Environmental Sustainability

Abstract

Environmental concerns in today’s world cannot be overemphasised. These concerns have interested policymakers and researchers to delve into the causes in order to help mitigate environmental deterioration and support policies and institutions for environmental sustainability. This study, therefore, investigates the association between foreign direct investment (FDI) and environmental quality, taking into account policies and institutions for environmental sustainability across 23 Sub-Sahara Africa (SSA) countries. Employing the generalised method of moment (system-GMM) for the analysis, the results revealed, among others things, that FDI improves environmental quality in the long run, whereas in the short run, FDI diminishes environmental quality when interacted with policies and institutions for environmental sustainability. Furthermore, policies and institutions for environmental sustainability and domestic investment improve environmental quality in SSA in both the long and short run. The study, thus, concludes that policies and institutions for environmental sustainability in SSA are important as they improve environmental quality as well as complement FDI to improve environmental quality in the long run. The study further establishes that domestic investment is important to improve environmental quality in SSA. The study recommends policies for improving environmental quality to policymakers and stakeholders in SSA.

The role of environmental regulatory quality in the relationship between natural resources and environmental sustainability in sub-Saharan Africa

“…The coefficients of these indicators 11 imply that environmental sustainability in SSA does not converge since a percentage increase in the past values of ecological footprint, material footprint, and sustainable development index causes environmental unsustainability in SSA by approximately 0.468%, 0.958%, and 0.907%, respectively. Muhammad et al (2021) provided similar evidence of no convergence in BRICS, developed, and developing countries, and Duodu et al (2021) in SSA.…”

“…Data on environmental regulation quality, domestic investment, foreign direct investment, urbanization, and trade openness were extracted from the World Development indicators. The choice of sample variables is based on the STIRPAT 10 model and previous literature ( Altinoz and Dogan, 2021 ; Duodu et al, 2021 ; Erdoğan et al, 2021 ). We report the description of the variables used for this analysis in Table A.1 (see the Appendix).…”

“…Following Brambor et al (2006) and Duodu et al (2021) , we further generate the marginal effects of the interaction between natural resources and environmental regulatory quality in equation (2) . This is because the marginal effects of the interaction term clearly show the true impact of a unit change in the natural resources on environmental sustainability than the coefficient of the interaction term.…”

“…However, many existing studies have shown evidence of how institutional quality or governance promotes environmental quality in MENA and Africa ( Abid, 2017 ; Bokpin, 2017 ; Adams et al, 2020 ; Ulucak et al, 2020 ). Others, such as Duodu et al (2021) , also narrowed down to the specific role of environmental policies and institutions and found that environmental policies and institutions sustain the environment. These studies have shown the importance of environmental regulatory quality in ensuring environmental sustainability.…”

“…First, this study considers the significance of environmental regulatory quality (ERQ) and its complementary role between natural resources and environmental sustainability. Studies ( Bokpin, 2017 ; Adams et al, 2020 ; Duodu et al, 2021 ) have shown that regulatory quality and institutions are one sure way to prevent environmental deterioration. Therefore, effective environmental regulatory quality could complement natural resource extraction to ensure a sustainable environment.…”