Foreign direct investment, environmental pollution and economic growth in sub–Saharan Africa: empirical evidence from panel data

This study investigates the impact of foreign direct investment (FDI) inflows and Carbon Dioxide (CO2) emissions on economic growth in Sub-Saharan Africa (SSA), focusing both on their partial and joint effects, and using dynamic panel data analysis for 40 SSA countries from 1990 to 2013. System GMM is our preferred estimator to estimate our empirical specification as it addresses most of econometric problems, including omitted variables biases and endogeneity. This study finds that the effects of FDI inflows on economic growth is positive and statistically significant, implying that FDI inflows is good for advancing growth in SSA. However, the impact of FDI inflows on growth is limited by the significance of CO2 emissions in the contingent (condition) relationship on the effect of FDI inflows on economic growth given CO2 emissions, which is negative and statistically significant. The study also finds that the effect CO2 emission on economic growth is negative and statically significantly, implying that high CO2 emissions are bad for growth in SSA. Interestingly, the impact of CO2 emissions is magnified by the significance of FDI inflows, as the interaction term between CO2 emissions and FDI inflow is negative, significant and greater than the marginal effect of CO2 emissions on growth, implying that some FDI inflows in SSA worsen environmental pollution. The implications of these findings are critical both for knowledge and policy makers. Much as policy makers in SSAs should device sound policies that aimed at creating conducive environment for attracting more FDIs to boost their growth, they should be aware of FDIs and production technologies that are causing environmental pollution.