Does FDI turn ‘Dirtier’ at higher growth levels? Evidence from non-linearities and threshold effects

Abstract

While a plethora of studies provide evidence of FDI's growth-enhancing capacities, less is known about the threshold for its environmental consequences. This study investigates the threshold effects of FDI across oil-rich, other-resource, and non-resource economies. We document a significant nonlinearity. In oil-rich economies, even modest inflows increase emissions through extractive industries, whereas in diversified economies, environmental effects emerge only at higher inflows. The findings indicate that economic growth is associated with higher emissions across African economies, consistent with the early-stage growth–emissions relationship described in EKC theory. Governance plays a critical moderating role, as stronger institutions mitigate emissions and shape the impact of FDI. Threshold analysis reveals that below critical levels, FDI's contribution is limited; however, once exceeded, its effects rise sharply, reflecting both pollution haven and halo dynamics. The findings establish the need for tailored investment and governance strategies that direct inflows toward green sectors while reinforcing institutions to align FDI with Africa's low-carbon future.