The Environmental Consequences of FDI and Trade Openness: Evidence from Pakistan

Abstract

The objective of this study is to determine the impact of trade openness (TO) and foreign direct
investment (FDI) on quality of environment in Pakistan. This study used ARDL bound test for cointegration, covering the period from 1975 to 2019. Statistical soundness of model is verified by using
diagnostic tests. The findings of ARDL bound test indicate a long run (LR) relationship between
variables. The feedback coefficient confirms the adjustment in equilibrium in the LR. The outcomes
reveal that both in LR and short-run (SR), FDI is detrimental for environment quality. Whereas, trade
openness improves environment quality in the LR but it is harmful in the SR. The findings endorse the
presence of Environmental Kuznets Curve in Pakistan. Residual based diagnostic tests ratify the
statistical soundness of the model. The results suggest that while pursuing trade openness and FDI
friendly strategies for economic expansion in Pakistan, policymakers should also take care of the
environment security. Otherwise FDI, trade-led growth will be threatening environmental sustainabilityin
a developing country which might be jeopardizing socio-economic development.