Does FDI Inflow Harm Environmental Quality in Indonesia? Evidence from ARDL Analysis
(1) Universitas Airlangga; Universitas Surabaya
(2) Universitas Airlangga
(3) Universitas Airlangga
(*) Corresponding Author
Abstract
As sustainability becomes increasingly embedded in global normative frameworks, the persistent technological and informational asymmetries faced by developing countries remain salient. While previous studies have produced mixed evidence on the environmental effects of foreign direct investment (FDI), limited attention has been given to the combined influence of FDI, trade openness, and industrialization on CO₂ emissions in Indonesia. This study examined whether inward FDI facilitates the transmission of environmentally beneficial practices from foreign enterprises to host economies. The analysis employs an Autoregressive Distributed Lag (ARDL) approach using annual time series data covering the period 1970-2022. The results suggest that, in the long term, FDI can improve environmental quality in Indonesia through reductions in CO₂ emissions. This finding supports the pollution halo hypothesis. In the short term, however, FDI exhibits a negative but insignificant effect, suggesting a gradual transition toward more sustainable operations. Additionally, trade openness and industrialization lead to greater CO₂ emissions, implying that increased trade and industrial activity may elevate the demand for “dirty goods” and consequently diminish environmental quality. The policy implications of this study emphasize the need for long-term strategies that attract environmentally sustainable FDI, support the transition toward cleaner trade and industrial activities, and improve investment procedures to accelerate technology transfer and maximize the positive environmental effects of FDI.
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DOI: http://dx.doi.org/10.33019/ijbe.v10i3.1582
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