The Role of Institution on FDI and Environmental Pollution Nexus

The research aim is to empirically study the role of institutions in the relationship between foreign direct investment (FDI) and environmental pollution in 86 developing countries during 2008–2018. This study collects key data from the World Development Indicators (WDI). Institution indicators are collected from the Global Governance Indicators (WGI). To carry out the research objectives, the authors conducted quantitative analysis through System Generalized Method of Moments (S-GMM). The research results indicate that FDI positively impacts on environmental pollution. In particular, governmental efficiency, political stability and non-violence, quality regulations, the rule of law and the voice and accountability play an important role in the FDI-environmental pollution nexus in developing countries. The findings of this study suggest that these countries in question need to consider very carefully welcoming FDI inflows. In other words, host governments should build ‘filter funnel’ to attract FDI for long-term development. Moreover, they also have to manage strictly foreign invested enterprises domestically in order to minimize negative impacts on environment quality. For a stable governance environment, each country must strictly follow international environmental agreements, and people and businesses must comply with environmental regulations and raise awareness of environmental protection as the foundation for economic growth and environmental sustainability.