FDI and Environmental Degradation: Evidence From a Developed Country

Introduction

Economic activities like foreign investments, global trade and transportation are essential for economic growth, which is the main goal to achieve for many countries around the world. However, rapid economic growth accompanied by excessive levels of such activities, industrialization, and higher population, result not only in increased levels of energy consumption by ongoing economic activities (Wang, Li, Fang, & Zhou, 2016), but also negative environmental impacts, especially the increased emissions and gradual gathering of Greenhouse Gases (GHG) in the atmosphere (Ahmad et al., 2016). The accumulation of GHGs is among the root causes of global warming, climate change and other factors that cause environmental degradation. All these factors have serious implications to the whole ecosystem and may roll back the development progress.

Due to significant pace of growth, global warming, climate change and environmental degradation draws more attention and awareness (Apergis & Ozturk, 2015; Destek & Sarkodie, 2019). Industrialization became more prominent in last few decades which resulted in an increase in energy demand. As this demand is usually met by non-renewable fossil fuels causing GHG accumulation, managing the trade-off between economic growth and environmental deterioration gets harder day by day (Uddin, Salahuddin, Alam, & Gow, 2017; Majeed & Mazhar, 2019). Economic growth usually brings in industrialization that adds value to the extracted resources and increases agricultural output which raises consumption of natural resources. Consequently, regenerative capacity of natural resources is exceeded, creating ecological deficits in more countries (Sarkodie & Strezov, 2019). The people all over the globe create ecological footprint that is 60% higher than ecosystems can renew (Global Footprint Network, 2020) as a result of which the human-induced pressures on the environment have become an important threat.

The major global challenges that the humanity must face is continuing economic development while preserving the environment simultaneously. This challenge forms the notion of “sustainable development.” Significant steps must be taken to prevent an environmental catastrophe while ensuring global sustainable development. The Sustainable Development Goals (SDG), two of which are fighting against climate change and creating access to affordable and clean energy for more people, were adopted in 2015 as a development guide for all the UN member states with the aim of forming their principles and activities to reach these objectives by the end of 2030 (UN, 2020). The success in achieving sustainable development requires staying under world’s average bio-capacity which is the capability of natural resources to renew (Global Footprint Network, n.d.b). However, many countries involve in excessive economic activities to achieve rapid economic growth, resulting in over-exploitation of natural resources and/or accumulation of GHGs. The ultimate outcome is unsustainable environment.

The relationship between the quality of environment and economic growth is explained by Environmental Kuznets Curve (EKC) hypothesis whereas Pollution Halo Hypothesis (P-HH) theorizes the relationship linkage between degradation of environment and inflows of foreign direct investment. In general both these hypotheses show the relationships for a developing country. EKC hypothesis defends that for a developing country, priorities are constructed upon economic growth instead of protection of the nature, while the latter two hypotheses investigate the impact of FDIs on the environmental deterioration in a developing country which depends on the attitudes of foreign investors. That is why, researching the validity of these hypotheses for a developed country case might be informative and pathfinder. It may pave the way for theories explaining better the relations mentioned above for the developed cases and may be insightful for policymakers.

The aim this chapter is to scrutinize the factors affecting environmental degradation with an empirical application for Sweden, a developed country. Examining and understanding these factors properly may result in efficient policy suggestions with the aim of creating a sustainable environment not only for this generation but also for the next ones. Economic growth, FDI inflows and environmental degradation are discussed. Hypotheses are constructed, and empirical analysis is made by using econometric techniques to test the hypotheses. In the last part, results are discussed and suggestions for future research are made.