Assessing the role of foreign direct investment in environmental sustainability: a spatial semiparametric panel approach

The debate on the environmental effects of foreign direct investment (FDI) has long been overdue but remains inconclusive. One key reason is that existing studies have focused mainly on the linear effect of FDI, ignoring its nonlinear effect. To remedy this deficiency, this paper establishes a nonlinear theoretical framework for modeling the connection between FDI and environmental pollution. Furthermore, we develop a spatial semiparametric autoregressive two-way effect panel data model to empirically test the nonlinear impact of FDI on China’s environment. The results reveal strong evidence for the positive spillover effect of pollutant emissions in the spatial distribution and an inverted “N-shaped” connection between FDI inflow and environmental pollution. The influx of FDI has been shown to positively moderate the impact of economic growth on environmental degradation. In contrast, FDI inflow has negatively mitigated the impacts of industrialization on environmental degradation. The findings also reveal that energy consumption, economic growth, industrialization, and population size exacerbate environmental pollution, while technology and urbanization do the opposite. The research results have important practical relevance for re-examining the environmental performance of FDI and formulating coherent policies for attracting investment and energy-reduction policies.