The Impact of FDI Inflows and Environmental Quality on Economic Growth: an Empirical Study for the MENA Countries

The Impact of FDI Inflows and Environmental Quality on Economic Growth: an Empirical Study for the MENA Countries Mohamed Abdouli 0 Sami Hammami 0 0 Faculty of Economics and Management of Sfax , Sfax , Tunisia This study examines the impact of foreign direct investment (FDI) inflows, environmental quality, and capital stock on economic growth in 17 Middle East and North African Countries (MENA) countries. We did our analysis in the panel framework over the period 1990-2012 using both the static (ordinary least squares method (OLS), fixed effect (FE), and random effect (RE)) and dynamic (difference-generalized method of moments (Diff-GMM) and system-generalized method of moments (SysGMM)) panel data approaches. The empirical results show that the increases in FDI inflows and capital stock enhance the economic growth process in MENA countries. On the other hand, our findings demonstrated that economic growth in MENA countries reacts negatively to the environmental degradation. These empirical insights are of particular interest to policymakers as they help build sound external and environmental policies to sustain economic growth. Economic growth; FDI inflows; CO2 emissions; Static and dynamic panel data; MENA countries - In the second decade of the twenty-first century, the effects of foreign direct investment (FDI) inflows and CO2 emissions on economic growth become a very significant topic both at the national and international level. However, economic growth is the mainstay of any country’s economic development because of its overall benefits in the different Mohamed Abdouli sectors of the economy. In addition, economic growth can increase the living standard if the nation’s wealth is fairly distributed. By the way, because of the positive influence on the aggregate demand, growth raises employment rates. Further, growth provides fiscal dividend through extra tax revenue that can be used to finance public projects. In fact, it enhances the effect by encouraging investment in new technology which can then help sustain economic growth through increased aggregate supply and boost business confidence through its positive impact on the firm’s profits, which in turn boost their stock exchange values resulting in the growth of big companies (Razmi and Refaei 2013). On the one hand, the FDI inflows and environmental quality are well known as very important factors in the economic growth process. The FDI inflows can play an important role by increasing and raising the supply of funds for domestic investment in the host country. This can be done through the production chain when foreign investors buy locally made inputs and sell intermediate inputs to local enterprises. Furthermore, the FDI inflows can increase the host country’s export capacity, causing the developing country to increase its foreign exchange earnings. FDI can also encourage the creation of new jobs, enhance technology transfer, and boost overall economic growth in the host countries (Belloumi 2014). On the other hand, environment pollutants affect economic growth. There is a proof of a global nature of air pollution and its effects on the earth’s surface. The distress fullness and the long-term damaging effect of environmental pollution can contribute to destructive consequences on human wellbeing and economy. This will lead to the increase of health and social costs (Borhan et al. 2012). Therefore, pollution may directly decrease the output by decreasing productivity of man-made capital and labor. Here, pollution appears as a negative externality. Because of health problems, there are losses of labor day, and due to polluted air or water, there are deteriorations in the quality of the industrial equipment. Secondly, the firm’s production costs are increased when firms abate pollution emissions. The nexus between FDI inflows and CO2 emissions to economic growth has been intensively and empirically analyzed over the last few years. This research can be categorized into two parts. The first part investigates the impact of FDI inflows on economic growth. Most of the past studies are concerned with the questions of whether a higher level of FDI inflows leads to higher additional economic growth. However, the role of foreign investment in economic growth has been considered one of the basic principles in economics. Empirical studies concluded that there is a broad consensus that investment is good for economic growth (Edwards 1998 and Baldwin 2003). These studies showed that the accumulation of foreign capital is one of the main determinants of economic growth. On the other hand, other empirical studies, Barrell and Pain 1999; Chakrabarti 2001; Schiff and Wang 2008; Batten and Vo 2009; Hooi and Wah 2010; Aizhan and Makaevna 2011; Soltani and Ochi 2012; and Melnyk et al. 2014) confirm that there is a positive impact of FDI inflow on economic growth. However, others concluded negative impacts (e.g., Sanders and Secchi 1974; Saltz 1992; Elboiashi (...truncated)