Does financial development and foreign direct investment improve environmental quality? Evidence from belt and road countries

This study examines the effect of financial development (FD) and foreign direct investment (FDI) on the environmental quality for the panel of 90 belt and road countries from 1990 to 2017. This study advances the knowledge of financial development by using the new comprehensive index, which is based on access, depth, and efficiency of financial markets and financial institutions and incorporated foreign direct investment as an important determinant of environmental quality. By applying the Driscoll-Kraay standard error pooled ordinary least square method, the empirical findings reveal that FD deteriorates the environmental quality by increasing the CO₂ emissions, while FDI improves environmental quality and the relationship between economic growth (EG) and CO₂ emissions is inverted U-shaped, i.e., presence of EKC hypothesis. The energy consumption and urbanization pollute the environment, while trade openness enhances the quality of the environment. Furthermore, the Dumitrescu-Hurlin (DH) panel causality test result confirms that the bidirectional causality exists among FD, trade openness, energy consumption, and urbanization with CO₂ emissions. The empirical results provide new insights for policymakers and also have several implications for the betterment of environmental quality.