How do trade and investment flows affect environmental sustainability? Evidence from panel data

Abstract The inter-linkage between trade and investment flows and environmental sustainability is a widely researched area. It has been noted that FDI is increasingly being directed to the LDCs and developing countries in recent period, whose export basket is generally more intensive in primary and manufacturing products. In this background, the current study contributes to the existing pool of research by conducting a panel data empirical analysis over 2000–10 for 114 countries to understand the relationship between trade and investment flows and environmental performance index (EPI) for countries at various income levels. The regression results indicate that while environmental sustainability of countries is negatively related with merchandise export orientation and FDI inward movements, it is positively influenced by service exports and FDI outward movements. The findings also confirm a positive relationship between several politico economic factors (e.g. liberal democratic setup and lesser corruption) and environmental performance of countries. Interestingly, the EPI variable displays a negative coefficient for lower income countries, while a positive relationship is noted for their higher income counterparts. The empirical findings lend proof to the contention that trade and investment flows significantly influences environmental sustainability of countries. It also raise serious concerns over the interface between environmental sustainability and economic and trade policy choice of developing countries and LDCs.

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