Financial development and FDI effects on environmental quality through capital adequacy

Abstract

This study examines the intricate connections between financial development, carbon dioxide (CO2) emissions, foreign direct investment (FDI), international trade, household consumption, and capital formation, focusing on their implications for environmental sustainability and economic growth. Using a robust econometric methodology, such as panel cointegration tests, the Fully Modified OLS (FMOLS) technique, and Panel Vector Error Correction Models (VECM), this study reveals important insights. The findings demonstrate that financial development can facilitate the transition to a low-carbon economy and stimulate economic growth. Foreign direct investment can promote the adoption of healthier technologies, but regulatory hazards may arise, whereas international trade can stimulate economic growth but increase emissions. Capital formation is essential to reducing CO2 emissions, and household consumption patterns significantly impact emissions. The study provides policy recommendations emphasizing green investments, emission regulations, technology transfer, consumer education, and innovation to foster sustainable economic development while mitigating environmental impact.