Influence of FDI on environmental pollution in selected Arab countries: a spatial econometric analysis perspective

This study investigates the spatial influence and spillover effects of foreign direct investment (FDI) on environmental pollution (EP) by using panel spatial data in 1970–2016 for 12 selected Arab countries. It employs the STochastic Impacts by Regression on Population, Affluence, and Technology (STIRPAT) model. The spatial econometric approach is applied to examine the validity of the pollution haven hypothesis (PHH) and the pollution halo hypothesis (P-HH) (from now on, we will use the acronyms PHH and P-HH to denote the pollution haven hypothesis and pollution halo hypothesis, respectively). The Sustainable Development Goals (SDGs) are linked to the study results with a focus on cleaner production practices. The global Moran’s I, local Moran’s I, and Lagrange multiplier (LM) tests are used to ascertain the existence of spatial autocorrelation (SAR) and determine its trend. We also apply the spatial lag model (SLM), the spatial error model (SEM), and the spatial Durbin model (SDM) to achieve the study objectives. Data are analyzed by using the SDM on the basis of the results of the Wald and likelihood ratio tests. The results of the LM and global and local Moran’s I tests confirm the existence of SAR. The SDM results reveal that a slight increase in CO₂ is an influence of the FDI on EP. Findings support the existence of PHH in the Arab countries. The direct effect of the FDI is increased CO₂ and environmental degradation, and the spatial spillover effects are statistically insignificant. This study suggests a set of policies for managing and directing FDI toward clean technology-based industries and reduced CO₂ emissions. Such policies may contribute to the achievement of some SDGs and balancing economic development and environmental sustainability according to the cleaner production practice perspective in the Arab countries and other states with similar conditions.