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Foreign direct investment and sustainable development : an empirical analysis of developing countrie
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Date
2002
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Abstract
This study empirically investigates the impact of FDI on the three dimensions of sustainable development (SD): economic growth, income distribution, and environment in an integrated framework and a case of developing countries. We also test how such impacts are moderated by the host countries conditions, including financial development, human capital, and institution. Then we further examine the role of Islamic finance in a smaller sample of Muslim developing countries and how it shapes the impact of FDI. Our study applies the two-step System GMM estimator and, for robustness check, the LSDVC method. Our data are sourced mainly from the World Bank, IMF, and Bank Scope databases. The thesis has the following important findings. FDI enhances sustainable development when financial development, human capital, and institution are sufficiently developed; there are thresholds or the minimum levels of these conditions where the impact of FDI becomes favorable to each SD dimension. Specifically, we found that FDI has a positive impact on growth when all three conditions reach their thresholds or higher. In addition, FDI does not worsen income distribution and the environment when human capital and institution reach the thresholds. If human capital and institution are not adequately developed, FDI contributes to higher income inequality and pollution. Another finding is that, in a smaller sample of Muslim developing countries, Islamic finance is a significant moderator of FDI impact. Similarly, we witness the thresholds or the minimum levels of Islamic financial development, beyond which the impact of FDI becomes favorable to sustainable development. Specifically, FDI increases economic growth and improves income distribution when Islamic finance reaches the thresholds or higher. Compared to the conventional counterpart, Islamic finance has additional benefits since it enhances the effect of FDI to reduce income inequality while its conventional counterpart does not. However, Islamic finance does not moderate the impact of FDI on the environment. These results contribute to the empirical literature in the field of sustainable development and Islamic finance. They also have significant policy implications. First, policymakers in developing countries are suggested to develop their financial systems, human resources, and institutional qualities at least to the thresholds or higher so that FDI positively contributes to sustainable development. Second, policymakers in Muslim developing countries are encouraged to develop Islamic finance to the thresholds or higher to receive the economic and social benefits of foreign investment. Besides, Islamic banks are suggested to become more proactive when providing fundings to ensure that FDI projects do not damage the environment. The caveat in this study is that our measures of sustainable development dimensions, namely economic growth, Gini coefficient, and carbon dioxide emission, might not fully include all aspects of the economic, social, and environmental pillars. Thus, future research could examine other measures of the SD dimension. For instance, they could capture the social pillar with poverty. In addition, they could explore how other conditioning variables, such as trade openness, moderate the impact of FDI on sustainable development in an integrated framework.
Keywords
Foreign Direct Investment (FDI)
Citation
Suwanhirunkul, S. (2002). Foreign direct investment and sustainable development : an empirical analysis of developing countrie (Doctoral dissertation). INCEIF, Kuala Lumpur. Retrieved from https://ikr.inceif.org/handle/INCEIF/4144
Publisher
INCEIF