Does FDI inflow harm environmental quality in Indonesia?
(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. This article examined whether inward foreign direct investment (FDI) facilitates the transmission of environmentally beneficial practices from foreign enterprises to host economies. Previous studies found mixed results; one argues that foreign firms contribute to environmental upgrading, while others contend that foreign firms invest in developing countries primarily to exploit lenient environmental regulations. To address this debate, the analysis applies Autoregressive Distributed Lag (ARDL) techniques to an extensive time series 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.
Keywords
References
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DOI: http://dx.doi.org/10.33019/ijbe.v10i3.1582
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