The Role of Foreign Direct Investment, Energy and Pollution in Obtaining Sustainable Economic Development

Abstract

Developing countries have encountered the issues of economic development and reducing pollution that need to be resolved to achieve sustainable development. However, this topic has not been widely explored. Since obtaining sustainable economic development is a priority, the nexus between foreign direct investment (FDI), trade openness (TO), final energy consumption (FEC), capital (K), income, and pollution (carbon emission) has been investigated in this paper. The research questions deal with the existence of the long-run, short-run and causality relationship between the selected variables. The paper aims to investigate these relations in Serbia during 1995-2018 by applying the autoregressive distributed lag model as the most commonly used and suitable co-integration model. The results present that FDI and TO will increase gross domestic product (GDP), while pollution will decrease it in the long-run. The existence of a short-run causality from FDI and TO to GDP is confirmed. The Granger causality test reveals that FDI has a unidirectional relationship to GDP, carbon emission, TO, and FEC. Furthermore, GDP, carbon emission and FEC have a unidirectional relation to TO. These results indicate that policies should combine FDI promotion and TO, with supervision of FDI effects on carbon emission to obtain sustainable economic development.