The Nexus Between Economic Growth, Foreign Direct Investment and Environmental Pollution in Sri Lanka

Abstract

Introduction - Globalization, liberalization and the exchange of capital flows are the most significant features in modern economics that have played a vital role in almost every economy. Meanwhile, in the recent past, the world heavily moves onto several manufacturing industries with highly pollution intensive. Therefore, the study focuses on the bidirectional and multidirectional nexus between these three variables over a long-time horizon. Design/methodology/approach The sample is based on Sri Lanka covering the period from year 1978 to 2019. Data was collected through secondary data sources such as United Nations Conference on Trade and Development and the world development indicators. The data was tested using time series ARDL regression model. Findings –Foreign Direct Investments and Gross Domestic Production has a significant impact towards each other’s, while, Gross Domestic Production and Carbon Dioxide (proxy for the environmental pollution) and Foreign Direct Investment does not have a significant impact. Form the Bound test it was proven that Gross Domestic Production and Carbon Dioxide does not have a long-term relationship indicating no cointegration. Conclusion – It is revealed that in the case of Sri Lanka, the significant economic opportunities to support economic development in the host economy are not brought by FDI inflows. It is not feasible to accept FDI inflows as the catalyst for economic growth, however the study offers evidence for a long-term correlation between GDP and FDI inflows. The instability of Foreign Direct Investments inflows and the home country's market cycle has reduced the effect of Foreign Direct Investments inflows on economic development of the country.