Does foreign direct investment impede environmental quality in high-, middle-, and low-income countries?

- We examine the non-linear relationship between FDI and environmental degradation.
- Pollution heaven hypothesis (PHH) is validated.
- Bidirectional causality between CO2 emissions and FDI is observed in global panel.

Under a multivariate framework, this paper aims to investigate the nonlinear correlation between foreign direct investment and environmental degradation for high-, middle-, and low-income countries with economic growth and energy consumption as additional determinants of environmental degradation. All variables were found to be nonstationary and cointegrated based on recent panel data unit-root tests and cointegration techniques. On applying fully modified ordinary least squares (FMOLS), the long-run results suggest the presence of an environmental Kuznets curve. In turn, foreign direct investment increases environmental degradation, thus confirming the pollution haven hypothesis (PHH). Moreover, the bidirectional causality between CO2 emissions and foreign direct investment is observed globally. The findings are sensitive to different income groups and regional analyses. In particular, these empirical findings aid sound economic policymaking for improving environmental quality and sustainable economic development.