Relationship between inward FDI and environmental degradation for Pakistan: an exploration of pollution haven hypothesis through ARDL approach

In many developing countries, rising pollution and FDI inflows are positively correlated. This paper explores the existence of pollution haven hypothesis in Pakistan by employing the autoregressive distributed lag (ARDL) bounds test on yearly data from 1971 to 2014 for foreign direct investment inflow and four pollutants, i.e., CO₂ emissions, CO₂ emissions from solid fuels, SO₂ emissions, and GHG emissions. In each case, eight different models are tested by incorporating different explanatory variables with foreign direct investment inflow. The outcome of this study shows that in some of the models a positive long-term relationship exists between FDI inflow and CO₂ emissions, CO₂ emissions from solid fuels, and GHG emissions and a negative long-term relationship between FDI inflow and SO₂ emissions. Overall, we found no conclusive evidence of the existence of the pollution haven hypothesis for Pakistan. As Pakistan is taking active measures to attract more FDI, it is essential to introduce appropriate environmental policies and institutional reforms that do not hinder FDI inflows.