Research in International Business and Finance 39 (2017) 239247

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Research in International Business

and Finance
journal homepage: www.elsevier.com/locate/ribaf

Full length article

Foreign direct investment and environmental sustainability

in Africa: The role of institutions and governance
Godfred A. Bokpin
Department of Finance, University of Ghana Business School, College of Humanities, University of Ghana, P.O. Box LG 78, Ghana

a r t i c l e

i n f o

Article history:
Received 2 March 2016
Received in revised form 26 July 2016
Accepted 28 July 2016
Available online 30 July 2016
Keywords:
FDI
Environmental sustainability
Governance
Institutions
Africa

a b s t r a c t
The African continent continues to explore more avenues to increasing its share of the global
FDI inows. In the midst of all these, very little has been said about how FDI among others
contribute to the environmental degradation of the continent. Literature is sparse when it
comes to how eco-unfriendly FDI ows could be, albeit its economic growth prowess. In this
very study, we employ the use of a 24 year panel data (19902013) across Africa to investigate the impact of FDI inows on the eco-system in order to situate Africas FDI ows within
the sustainability development agenda popularized in the 80s. For the rst time, we investigate how governance and institutions may regulate the impact of FDI on environmental
sustainability. We do this conscious of the fact that other factors could also impact negatively on Africas eco-system which we control for in the empirical model. The empirical
results compositely reveal an increase in FDI inows signicantly increases environmental
degradation; hence causing a negative impact on sustainability of the environment. Year
dummies indicate that environmental degradation in the post 2010 era is greater than
degradation in 1990 which was used as the reference point. The study afrmed that, for FDI
to have a positive impact on environmental sustainability, there need to be strong governance and quality institutions in place to check the conduct of businesses nanced through
the FDI ows. The study provides empirical evidence to anchor governance and institutional
policy prescriptions towards reducing the negative impact of FDI ows on environmental
sustainability within the sustainable development preposition.
2016 Elsevier B.V. All rights reserved.

1. Introduction
It is almost becoming a clich that FDIs to a very large extent, inuence the economic prospects of recipient nations
positively. On annual basis, Sub-Saharan African countries receive signicant amounts of FDI from other parts of the world.
Even in 2008 when the global nancial crisis was just about happening, FDI ows to Africa grew strongly. Sub-Saharan Africa
(SSA) received about $64 billion representing 5.2% of global FDI (World Bank et al., 2011). With the occurrence of the crisis,
FDI ows to Africa recorded a fall of less than 15% in 2011 (United Nations Conference on Trade and Development, 2011).
Although the gures show that Africa has and continues to receive FDIs, there are still more that could be done to attract
many more FDIs into the sub region. In their quest to increase the ow of FDIs into the region, many African countries are
making mammoth efforts to facilitate and increase the inows of FDI by embarking on wide-ranging policy changes, such as
political and institutional reforms to remove barriers to trade and FDI inows (Cleeve, 2012). Some studies (see Ayadi, 2009;

E-mail address: gabokpin@ug.edu.gh

http://dx.doi.org/10.1016/j.ribaf.2016.07.038
0275-5319/ 2016 Elsevier B.V. All rights reserved.

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G.A. Bokpin / Research in International Business and Finance 39 (2017) 239247

Ayadi et al., 2010) argue that Trade and investment liberalization, privatization, and investment incentives have received
considerable attention via structural adjustment and austerity programs under the auspices of the International Monetary
Fund (IMF) and World Bank (WB) to attract FDI, which in turn was expected to stimulate economic growth, generate new
employment opportunities and facilitate the transfer of technology.
What appears to have been missing in the argument is how these institutions ensure that the increase in FDI ows to the
continent does not compromise the environmental sustainability of the African continent which has become necessary, given
the popularization of the sustainable development preposition in the 80s. While the subject of FDI has received and continues
to receive several attention in the literature, very little is known about how FDI ows affect the African environment. This
development highlights the need to place the FDI-economic growth debate within the sustainability context as rst made
popular by the Brundtland and World Commission on Environment Development (1987) and the need to adopt a strong
sustainability position for the discussion and implementation of the post-2015 sustainable development policies as opined
by Pelenc et al. (2015). This is particularly so because, there is ample evidence to reasonably suggest that the ow of FDI
into the sub region may have some environmental repercussions. There have been several debates on the consequences
of FDI for less-developed countries especially in the area of macrosociology and its sister disciplines (see Hoffman et al.,
2005; Kentor and Boswell, 2003). Emerging literature has it that, FDI inows may contribute to different forms of pollution
and environmental degradation in less-developed countries (e.g. Jorgenson, 2007, 2009a,b; Jorgenson et al., 2007). Some
studies argue that, in recent years, many less-developed countries experienced a deepening of foreign debt, which resulted
in austerity measures developed by global governance institutions (McMichael, 2004). These austerity measures are often
required to encourage the governments of indebted countries to create more favorable operating environments for foreign
investors and transnational corporations. These conditions have often times included tax reductions or exemptions and
relaxed labor laws, as well as exemptions to environmental regulations designed to protect the natural environment from
productive and extractive activities in different sectors of the economy (e.g. Jorgenson, 2009a,b; Clapp and Dauvergne, 2005;
Leonard, 1988; Shandra et al., 2008). With the relaxation of some of these environmental regulations, many comparative
sociologists (e.g. Grimes and Kentor, 2003; Jorgenson et al., 2007) posit that, a large proportion of FDI inows to lessdeveloped countries nances highly polluting and ecologically inefcient manufacturing processes and facilities, much of
which are outsourced from developed countries. Given the not far reaching negative implications of some FDI inows, it is
important that we reexamine the nature of FDI inows into Africa to nd out how such foreign capital inows have led to
environmental degradation in forms that include pollution of water bodies, toxic substances emission, and deforestation.
This study therefore investigates the effect of FDI inows on the environmental sustainability of Africa. Till date, it is not
clear whether FDIs into Africa have been eco-friendly.
H1.

FDI inows has a negative impact on Africas environmental sustainability agenda

Crucial to the FDI-environmental sustainability relationship is the role of institutions and governance. Foreign capital
ows will naturally be directed towards areas where there are less restrictions, in order to maximize returns. However, it
is the role of government and its allied institutions to ensure that the negative repercussions of FDI are contained within
a regulated framework, so as not to cost the environment so much in an attempt to x the economy. Some studies have
already laid the foundation of the debate that the state has a role in buffering the potentially detrimental impacts of foreign
investment dependence (e.g. Bornschier and Ballmer-Cao, 1979; Lee et al., 2007). Some studies have sort to document that
in the midst of FDI ows, the environmental protection could be enhanced with increased state responsiveness and high
concomitant policy capacity (Ehrhardt-Martinez et al., 2002; Fisher and Freudenburg, 2004). This means that the strength of
state institutions such as environmental protection agencies, and their governance structures may inuence how FDI affect
environmental sustainability. We therefore employ the use of an interactive term to test the moderating role of governance
and institutions in the relationship between FDI ow and environmental sustainability.
H2.

Relatively strong governance institutions mitigate the effect of FDI on environmental sustainability in Africa.

In this study, we used a panel data methodology to empirically test our two main hypotheses which will lead to a
documentation of the impact of FDI inows on environmental sustainability and how strong institutions may mitigate such
negative repercussions.
In this study, we document the impact of foreign capital inows on environmental sustainability in Africa and the moderating role played by governance and institutions in such relationship. Enough attention has already been given to the
determinants of FDI inows and several efforts are being made to promote same. It is very important that we nd ways of
ensuring that, the promotion of FDI inows does not hurt the eco-system of the African continent, and thereby contradicting
the sustainability development agenda popularized in the late 80s. To this, we explore the impact of FDI inows and the
moderating role of institutions on environmental sustainability, while controlling for other country-specic factors capable
of inuencing environmental sustainability.
1.1. FDI and environmental degradation in Africa
FDI is known in the standard literature to have a lot of positive effect on the host country including real exchange rate
(see Choi and Jeon, 2007), economic growth via capital investment, technology and management, boost corporate social
responsibility activity. But FDI is also known to have detrimental effect on the environment. This was made more manifest

G.A. Bokpin / Research in International Business and Finance 39 (2017) 239247

241

with the age-long debate on exhaustible resources (Solow, 1974; Stiglitz, 1974) and over the possibility of continual growth
with exhaustible resources (Meadows et al., 1972). Environmental degradation is of particular importance to Africa since
FDI ows to the continent is driven largely by natural resource endowment (see Bokpin et al., 2015). According to the
Brundtland and World Commission on Environment Development (1987), environmental degradation, rst seen as mainly a
problem of the rich nations and a side effect of industrial wealth, has become a survival issue for developing nations. Notably,
the pollution havens hypothesis basically states that companies will move their operations to less developed countries in
order to take advantage of less stringent environmental regulations (see Mabey and McNally, 1999) thus making Africa an
easy prey. To them, due to both market and policy failures and competition effects, natural resources are being excessively
exploited and that foreign investors have also been able to expropriate overly generous economic rents from the extraction
of these resources. Higher CO2 emissions (environmental degradation) could lead to loss of labour hours as a result of health
related issues and consequently, reduction of the productive capacity of the African continent. It has long been recognized
that Africas wealth depends on natural resources and its conservation, as increasing degradation results in lower crop
yields, thus affecting productivity of farmers as a result of drought and ecological imbalances. Mabey and McNally (1999)
contend that environmental degradation reduces the ability of an economy to produce goods and services over time due to
the reduction in natural resource inputs such as soil fertility and ecosystem productivity more generally; and that about 20
percent (50 million ha) of land is suffering from soil degradation, signicantly reducing future productivity. Jorgenson et al.
(2007) posit that a large proportion of FDI inows to less-developed countries nances highly polluting and ecologically
inefcient manufacturing processes and facilities, much of which are outsourced from developed countries.

2. Theoretical and empirical review

The rationale for the need for foreign investment has been debated well within the nance literature as having to bridge
the internal resource and savings gap, increase managerial abilities, reduce the foreign exchange shortage and improve
balance of payment in less developed countries (Aliyu, 2005). This is grounded in theoretical studies and earlier empirical
studies on liberalization for the purpose of driving growth through trade (Bhagwati and Srinivasan, 1983; Krueger, 1997).
However, theory has it that, economic growth may have some damaging consequences for the environment. This argument
is carried in the Environmental Kuznet Curve (EKC) theory which stems from Kuznets (1995) economic growth- inequality
nexus argument. It is important however to note that the EKC does not address directly the relationship between FDI
and environmental sustainability but through an indirect channel- that, FDI promotes economic growth which in turn
increase CO2 emission. In recent times, a more direct theory that addresses the relationship between FDI and environmental
pollution has gained and continues to gain attention in the literature. This is the pollution havens theory which postulates
that, multinational rms engage in highly polluting activities move in developing countries with weaker environmental
standards where the cost of complying with environmental regulations is very low. This theory implies that FDI will naturally
ow towards countries with weak governance and institutional structures and hence, successfully result in depleting the
environment. It is therefore not surprising that FDI ows into developing countries have been rising sharply over the past
decades (UNCTAD, 2005). Although some studies (see Smarzynska and Wei, 2005; Eskeland and Harrison, 2003; Dean et al.,
2002) nd little evidence for the pollution haven hypothesis, there is enough reason to still believe that there is still
considerable controversy over the empirical signicance of the existence of the pollution havens (Spatareanu, 2007). In
a study by Ederington et al. (2005), they control for three main factors that might have masked the pollution havens
theory. These were; (1) the fact that the majority of trade occurs between developed countries, with comparable levels of
environmental stringency; (2) industries degree of mobility; and (3) the share of cost of complying with environmental
regulations to total costs. After accounting for these factors, they found a signicant, though small, effect of environmental
regulations on FDI/trade. This shows that there is still more to do to bring the debate on pollution havens to rest.
The issue of institutions and FDI ows is never new to the nance literature. The debate has gained some popularity
especially in emerging economies where institutions are still being developed. With focus on Africa, Lemi and Asefa (2003)
showed that there is differential effect of governance on FDI ows in different industries due to the objectives of the FDI
rms that enter African economies. In a theoretical study, Li and Resnick (2003) developed a model to study the effect of
domestic institutions on FDI ows. They document that institutions affect FDI in a very complex style. On the side of their
seemingly conicting nding, increased democracy helps the judicial system and rule of law, which may imply a decreased
country risk and hence attract FDI. However, it could also drive foreign investors away by imposing constraints on foreign
capital and also the foreign investors. The literature shows that institutional quality may moderate the ow of FDI which
may negatively inuence the environmental sustainability of host countries. However, there is very little if any to show the
joint inuence of FDI, governance and institutional quality in the literature. This study therefore seeks to bridge this gap
by employing an African panel data set to investigate the relationship between FDI and environmental sustainability, while
addressing the moderating role of governance and institutional quality on such relationship.

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G.A. Bokpin / Research in International Business and Finance 39 (2017) 239247

Table 1
Measurement of Variables.
Variable

Description

Measurement

NRDEP

Natural Resources
Depletion

Natural resource depletion is the sum of net forest depletion

FRDEP

Forest Reserve
depletion

Net forest depletion is calculated as the product of unit resource rents and the
excess of round wood harvest over natural growth.

FDI

Foreign Direct
Investment

Foreign direct investment are the net inows of investment to acquire a

lasting management interest (10 percent or more of voting stock) in an
enterprise operating in an economy other than that of the investor.

INST

Institutional and
Governance Quality

Property rights and rule-based governance assess the extent to which private
economic activity is facilitated by an effective legal system and rule-based
governance structure in which property and contract rights are reliably
respected and enforced.

GDP

Economic Growth

GDP per capita is gross domestic product divided by midyear population.

URBAN

Level of urbanization

Urban population refers to people living in urban areas as dened by national

statistical ofces. It is calculated using World Bank population estimates and
urban ratios from the United Nations World Urbanization Prospects.

LDI

Level of domestic
Investment

Investment in energy projects with private participation covers infrastructure

projects in energy (electricity and natural gas transmission and distribution)

Notes: Data on all the variables was sourced from World Development Indicators (WDI, 2015).

3. Methodology
3.1. Model specication and data availability
The study uses a panel data methodology by pooling a cross-sectional country specic data over a 24 year period
(19902013). The following empirical model is estimated in order to test our hypotheses;
ENVS it = FDI it + FDI 2it + INST it + (FDI it INST it ) + COTRLit + i + t + i
where refers it to country i in time t. Y is the dependent variable denoting environmental sustainability. We employ alternative measures of environmental sustainability; namely, net forest depletion and natural resource depletion. An increase
in any of these measures implies a reduction in environmental sustainability. Data on these variables were sourced from
world development indicators (World Bank Group, 2015). FDI represents foreign direct investment measured as foreign
direct investment, net inows (% of GDP). We include the squared term of FDI in the model to test for possible non-linear
relationship that might exist between FDI and environmental sustainability. INST represents governance and institutional
quality. Consistent with Mon and Sekkat (2004), we use property rights and rule-based governance ratings from WDI as
a proxy for good governance. COTRL is a vector of country specic control variables that includes GDP per capita, which
measures a countrys level of economic development; urban population as a percentage of total population which controls
for a countrys level of urbanization. Another variable controlled for is investment in energy projects which is used to proxy
the level of domestic investment. Controlling for domestic investment allows for a more rigorous assessment of the effects
of foreign investment. We measure domestic investment as the natural log of total investment in energy projects with
private participation. As well, we control for year dummies to take care of changes in environmental sustainability that
might have occurred due to more awareness with the passage of time. i represents country xed effects which control for
time-invariant unobserved country characteristics. t represents time xed effects (though time dummy coefcients were
not reported) and it is the random error term of the equation. In analyzing the data, several estimation techniques were
employed to provide robust evidence to the relationship between FDI and environmental sustainability and the moderating
role played by governance and institutional quality (Table 1).
4. Results
Table 2 presents a summary of the data used in estimating the empirical model. The summary comprises descriptive
statistics, shapiro wilk normality test as well as the correlation matrix. The descriptive statistics provides us an insight into
the nature and distribution of the data and also serve as a guide in identifying potential outliers that may bias our econometric
estimation. Due to the transformations that our variables have undergone (taking their natural logs), very little can be said
about their nominal values. However, the SD and the kurtosis do not show an unusual pattern that requires much attention.
The Shapiro wilk normality test also fails to reject the null hypothesis of univariate normality in all the variables. This adds
to the reasons why the study goes beyond the use of the ordinary OLS since coefcients estimated from such technique may
no longer be Best Linear Unbiased Estimators (BLUE).

G.A. Bokpin / Research in International Business and Finance 39 (2017) 239247

243

Table 2
Data Summary.
Descriptive Statistics

Mean
Median
SD
Max
Min
Kurtosis

NRDEP

FRDEP

FDI

INST

GDP

URBAN

LDI

0.4620
0.7306
1.0686
1.9535
4.6640
5.7750

0.9086
0.8511
1.2507
1.6498
4.5624
2.5504

0.1632
0.3134
0.8193
2.2090
5.8855
9.8702

0.4372
0.4491
0.0869
0.6021
0.0000
5.4017

4.7679
5.0135
0.9959
6.9115
2.5080
2.3841

1.5228
1.5616
0.2226
1.9378
0.7337
3.1669

7.9419
8.0932
0.6597
9.6111
6.0000
2.7969

Shapiro Wilk Normality Test

Variable

NRDEP

FRDEP

FDI

INST

GDP

URBAN

LDI

Obs
W
V
z
Prob > z

1248
0.85
116.83
11.90
0.0000

1224
0.98
12.82
6.37
0.0000

1247
0.89
82.24
11.02
0.0000

1233
0.94
44.12
9.46
0.0000

1248
0.97
19.31
7.40
0.0000

1248
0.97
21.88
7.71
0.0000

1220
0.96
31.44
8.61
0.0000

Correlation Matrix

NRDEP
FRDEP
FDI
INST
GDP
URBAN
LDI

NRDEP

FRDEP

FDI

INST

GDP

URBAN

LDI

1.00
0.14***
0.06**
0.10***
0.03
0.02
0.06*

1.00
0.13***
0.00
0.22***
0.05*
0.10***

1.00
0.15***
0.06*
0.33***
0.03

1.00
0.11***
0.04
0.16***

1.00
0.08***
0.09***

1.00
0.21***

1.00

Notes: a) *, ** and *** indicate level of signicance at 10%, 5% and 10% respectively. b) NRDEP represents Natural Resource depletion; FRDEP represents Net
forest depletion; FDI represents foreign direct investment; INST represents institutional and governance quality; GDP represents Gross Domestic Product
per capita; URBAN represents Urban population, LDI represents level of domestic investment.

The correlation matrix shows that although signicant associations exist between some of our variables, none of such
correlations is high enough (above 50%) to cause possible multicolinearity in our regression model. That notwithstanding,
the correlation matrix shows that there exists a positive relationship between our measures of environmental sustainability
and FDI. Given that our measures are depletion measures, the positive relation signies that environmental degradation
increases with FDI inows. It is however important to note that the positive correlation between FDI and environmental
degradation is not misconstrued to mean causality when evidence of the empirical model has not been shown. We further
nd a positive relationship between domestic investment and environmental degradation measured as natural resources
depletion, but a rather negative relationship between domestic investment and forest reserve depletion. This presents
some level of ambiguity with respect to the nature of the relationship between domestic investment and environmental
sustainability. This relationship, though not causality implies that, domestic investment may decrease or increase with
environmental sustainability. We nd a signicant negative correlation between natural resource depletion and institutional
and governance quality. This relationship connotes that strong institutions move with an improvement in the environmental
sustainability. While an ambiguous relationship exists between environmental sustainability and growth (GDP), we nd
urbanization to positively correlate with our inverse measures of sustainability. The relationship suggests that increased
urbanization increases degradation and reduces environmental sustainability.
Mindful of the fact that our conclusion cannot be premised by mere correlation relationships, we proceed to empirically
estimate our models that seek to provide some evidence in support of the relationship between FDI inows into Africa and
Environmental Sustainability. To provide robust evidence in support of this relationship, we employ the use of alternative
measures of environmental sustainability. As well, we employ the use of alternative estimation techniques to ensure that our
results are robust to varying estimation techniques and alternative measures of environmental sustainability. We employ two
inverse measures of environmental sustainability. These are natural resource depletion and forest reserve depletion (details
on their measurement are provided in Section 3). Since these are inverse measures of environmental sustainability, an
increase in these variables indicates a worsening environmental sustainability position. These measures are direct measures
of environmental degradation therefore a reduction in them indicates an improvement in the environmental degradation
position of the country in question (Table 3).
Our choice of these variables over other possible measures of environmental degradation stems from the fact that in recent
times, very little of FDIs have been directed to the manufacturing sectors. However, the mining sector and other extractive
industries have beneted so much from the inow of foreign direct investments. This means that natural resource depletion
and forest reserve depletion are potent measures that capture the implications of the ow of funds to these African countries.
On the estimation techniques adopted, we rst estimate the xed and random effects, though our hausman specication

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G.A. Bokpin / Research in International Business and Finance 39 (2017) 239247

Table 3
Fixed and Random Effect Estimation (Forest Depletion as dependent variable).
Forest

FDI
INST
GDP
URBAN
LDI
FDI*INST
FDI2
Wald chi2(30)
Prob > chi2
F(30, 1128)
Prob > F
Number of obs
R-sq: within
Hausman chi2(30)
Prob > chi2

RE

FE

Coef.

Std. Err.

P>z

Coef.

Std. Err.

P>t

0.5788
1.2355
0.2355
2.3706
0.0460
1.0858
0.0041

0.1772
0.5449
0.0963
0.4205
0.0628
0.4121
0.0145

3.27
2.27
2.44
5.64
0.73
2.63
0.28

0.0010
0.0230
0.0150
0.0000
0.4650
0.0080
0.7780
525.7400
0.0000

0.6336
1.5777
0.1446
4.2964
0.0882
1.2270
0.0062

0.1773
0.5604
0.1320
0.5582
0.0644
0.4117
0.0144

3.57
2.82
1.10
7.70
1.37
2.98
0.43

0.0000
0.0050
0.2730
0.0000
0.1710
0.0030
0.6660

1209
0.3249

18.7100
0.0000
1209
0.3323
32.5700
0.3414

test was in support of the xed effect estimation. We then estimate the robust OLS after which we estimate the model
using the panel corrected standard errors. Our estimations are robust to serial correlation and heteroscedasticity. In all these
estimations, we use forest reserve depletion as our measure of environmental sustainability. Using the natural resource
depletion as our measure of environmental sustainability, we estimate the panel corrected standard errors and the robust
OLS to provide further robustness to the ndings of our study. The relationship between FDI institutions and environmental
sustainability was found to be consistent with our several estimation techniques and alternative measures.
Our results show a signicantly positive relationship between our inverse measures of environmental sustainability. This
means that an increase in FDI inows signicantly increases environmental degradation; hence causing a negative impact on
sustainable environment. Although several studies have documented the positive impact of FDI inows on growth and have
recommended strategies to increase such, this current nding indicates that there are negative environmental sustainability
externalities associated with FDI inows. We interpret our ndings to mean that in Africa, a signicant percentage of the
FDI inows has been directed towards the raw resources extraction and other extractive industries. Through this process,
signicant damage is caused to the health so to say of the environment. Guided by the indirect Environmental Kuznet Curve
effect discussed in the theoretical review section of the study, we tested for possible non-linear relationship between FDI and
environmental sustainability. In doing so, we include the squared term of FDI in our empirical model. The results showed
that there is no signicant relationship between the squared term of FDI and environmental sustainability. This means
that the Environmental Kuznet Curve effect that explains the non-linear relationship between growth and environmental
sustainability does not hold for FDI, though FDI is found to correlate positively with growth.
In our xed and random effect estimations where forest reserve depletion is used as a measure of environmental sustainability, we nd a negative and signicant relationship between our measure of governance and institutional quality
and environmental sustainability. In the panel corrected standard errors and robust OLS estimations, we nd no statistically signicant relations between institutional quality and environmental sustainability. However, using natural resource
depletion as a measure of environmental sustainability and estimating the PCSE and the robust OLS, we again nd a negative relationship between institutional quality and our inverse measure of environmental sustainability. The results though
quite ambiguous, provide ample support for a negative relation between institutional quality and environmental degradation. This implies that strong governance and quality institutions promote environmental sustainability across Africa.
This is particularly so due to the fact that countries with strong institutions are able to task their environmental protection
agencies to be strict in monitoring environmental sustainability regulations and to also ensure their enforcement. When
such institutions are weak, then players within the economy may adopt processing technologies that only achieve the goals
of the manufacturing and extraction entity at the expense of the sustainable needs of the environment (Tables 4 and 5).
To ascertain whether the relationship between FDI and environmental sustainability is inuenced by the governance
and institutional quality, we interact FDI and institutional quality. The results show that though FDI at levels has a positive
relationship with environmental degradation, when interacted with institutional quality, it has a negative relation with
environmental degradation. The result means that FDI inows in themselves could impact negatively on the sustainability
of the environment, but when there are quality institutions to check the activities of managers of FDIs and the recipient
organizations, the result could be positive on environmental sustainability. The implication of this nding is that, for FDI to
have a positive impact on environmental sustainability, there is the need for strong governance and quality institutions in
place to check the conduct of businesses nanced through the FDI ows.
We document that the relationship between economic growth and environmental sustainability is ambiguous. While
we record a positive relationship in some of our estimations, in others, we document a negative relationship between
economic growth and environmental sustainability. Even in some of the cases, the relationship (either positive or negative)

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245

Table 4
PCSE and Robust OLS Estimation (Forest Depletion as dependent variable).
PCSE

FDI
INST
GDP
URBAN
LDI
FDI*INST
FDI2
Wald chi2(22)
Prob > chi2
F(30, 1178)
Prob > F
Number of obs
R-squared

Robust OLS

Coef.

Std. Err.

P>z

Coef.

Robust Std. Err.

P>t

0.7454
0.5728
0.3072
0.2834
0.2203
1.3206
0.0383

0.1799
0.4233
0.0206
0.0873
0.0313
0.4389
0.0234

4.14
1.35
14.90
3.25
7.05
3.01
1.64

0.0000
0.1760
0.0000
0.0010
0.0000
0.0030
0.1010
17589.07
0.0000

0.7454
0.5728
0.3072
0.2834
0.2203
1.3206
0.0383

0.2723
0.4600
0.0307
0.1547
0.0449
0.6505
0.0143

2.74
1.25
10.00
1.83
4.91
2.03
2.67

0.0060
0.2130
0.0000
0.0670
0.0000
0.0430
0.0080

9.4100
0.0000
1209
0.1917

1209
0.1917

Table 5
PCSE and Robust OLS Estimation (Natural Resource Depletion as dependent variable).
PCSE

FDI
INST
GDP
URBAN
LDI
FDI*INST
FDI2
Wald chi2(30)
Prob > chi2
F(30, 1187)
Prob > F
Number of obs
R-squared

Robust OLS

Coef.

Std. Err.

P>z

Coef.

Robust Std. Err.

P>t

0.5406
1.3452
0.0156
0.0681
0.1054
1.0499
0.0734

0.2113
0.4135
0.0268
0.1188
0.0426
0.5082
0.0174

2.5600
3.2500
0.5800
0.5700
2.4800
2.0700
4.2300

0.01
0.00
0.56
0.57
0.01
0.04
0.00
107.63
0.0000

0.5406
1.3452
0.0156
0.0681
0.1054
1.0499
0.0734

0.1897
0.4076
0.0273
0.1238
0.0455
0.4644
0.0156

2.85
3.30
0.57
0.55
2.32
2.26
4.71

0.0040
0.0010
0.5670
0.5820
0.0210
0.0240
0.0000

1218
0.0811

3.72
0.0000
1218
0.0811

is not statistically signicant at any of the traditional/conventional levels (1%, 5% or 10%). This means that we are unable to
ascertain the relationship between economic growth and environmental sustainability as at now.
Using forest reserve depletion as an inverse measure of sustainability, we nd a signicantly positive relationship between
level of urbanization and degradation. This means that an increased level of urbanization negatively impacts on environmental sustainability. This nding is consistent across the various estimation techniques. Although the models with natural
resource depletion as dependent variables did not produce signicant relationship between the two, there is still enough
evidence to conclude that urbanization negatively impacts on environmental sustainability. This is as a result of the fact that,
increased urbanization increases the level of economic activities in the urban centres, thereby leading to the detrimental
effect on the sustainability of the environment.
On the relationship between domestic investment and environmental sustainability, our ndings provide inconclusive
evidence. While some estimations showed a signicant positive relationship, others show a negative relationship rather and
still others, no relationship. Although we are of the view that the nature of the domestic investment may play a signicant
role in determining its relationship with environmental sustainability, we employ further studies to concentrate attention
on this enquiry. Controlling for year dummies (results not reported for brevity), it was realized that year dummies before
2010 were generally negative, indicating that degradation in those years were lower than 1990 (which was used as the
reference point). However, the ndings show that in the post 2010 era, the dummies were showing positive coefcients.
This implies that environmental degradation in the post 2010 era is greater than degradation in 1990. But for the negative
coefcients for preceding years, it would have seemed pretty understandable that degradation has worsened in the post
2010 era relative to 1990. This nding shows that environmental sustainability has worsened in the post 2010 era and
hence demands an increased attention. It is therefore not surprising that these issues feature on the list of seventeen (17)
Sustainable Development Goals (SDGs).
5. Conclusion and policy implications
The economic benet of FDI has received much attention in the literature. Although there are some varied conclusions
drawn, largely FDI has been reported to impact economic growth positively. In recent times the debate has been extended
from growth to include the sustainability of the environment, even in the midst of growth of countries. The Environmental

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G.A. Bokpin / Research in International Business and Finance 39 (2017) 239247

Kuznets curve theory has been relied on to explain the relationship between economic growth and environmental sustainability; but until now, little is known about the direct relationship between FDI and environmental sustainability. In this
study, we investigate the direct inuence of FDI on environmental sustainability and proceed to investigate the moderating
role played by good governance and quality institutions on this relationship. Our results showed that FDI impact negatively
on environmental sustainably. However, when interacted with institutional quality, a positive relationship with sustainability is documented. By way of testing the Environmental Kuznets curve theory, this time through FDI but not the usual
growth, we nd that the relation between FDI and environmental sustainability does not go beyond the linear relationship.
The policy implications of this nding is that, FDI promotion must be done sparingly due to its known negative effect on
environmental sustainability. There is no need to grow our economies in the short run while we destroy the environment
that will sustain life in the long run. There is no prudence in destroying the environment to build wealth when we cannot
live long enough to enjoy such wealth. Broader governance and institutional reforms must be put in place to anchor the
relationship between FDI and growth within the context of environmental sustainability. For African countries where short
term growth needs require the promotion of FDI inows, governance and institutions must be strengthened to regulate the
activities of rms and individuals that may impact on the environment. This is necessary to ensure that Africa development
drive is consistent with the sustainable development agenda. In the presence of quality institutions FDI inows are not
detrimental to environmental sustainability. Governments are encouraged to put in place strategies that may reduce the
pace of urbanization which put excessive pressure on the environment and threatens its sustainability. Going forward, one
important question that government and economic agents should seek answers to is what is the sagacity in destroying the
environmental to build wealth we may not live long enough to benet?

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