Mediating Effects of Foreign Direct Investment Inflows on Carbon Dioxide Emissions

Abstract

In this research, the direct and indirect effects of foreign direct investment (FDI) inflows on carbon dioxide (CO2) emissions in India are examined, covering the period from 1980 to 2014. To quantify the indirect outcome of the existence of FDI on CO2 emissions, in this study, the three mediating channels of FDI are considered. The three broad mediating channels of FDI inflows are energy structure, industrial structure, and high-carbon technology, by which foreign direct investments affect India’s carbon dioxide emissions. In this study, the unit root test, the Johansen cointegration, the Granger causality technique, and the seemingly unrelated regression (SUR) are used for the empirical analysis. The findings discover a process of cointegration in the long-run and reveal unidirectional causation between FDI inflows and CO2 emissions. The outcomes of the SUR estimation indicate that all the mediating factors substantially contribute to the level of CO2 emissions. In this paper, the findings reveal that FDI inflows affect the level of India’s CO2 emissions mainly via mediating factors compared to their direct effect. Finally, in this research, it is recommended that the concerned authorities should prioritize the redistribution of foreign direct investment from high carbon-intensive technologies to less carbon-intensive and cleaner technologies for India’s carbonless and sustainable future.