The spillover effects of outward FDI on environmental sustainability in developing countries: exploring the channels of home country institutions and human capital

Foreign direct investments (FDI)-induced environmental effects have become a crucial and frequently discussed issue that has attracted the attention of the international community. On this account, several studies have examined FDI and carbon dioxide (CO2) emission relationship but with focus on the environmental impact of FDI inflow for host countries. While the strand of study examining CO2 emissions and outward FDI relationship are scarce, the mediating mechanism of home country’s institution and human capital level in outward FDI-CO2 relationship remains unexplored. This study aims to fill this research gap by using the extended Stochastic Impacts by Regression on Population, Affluence, and Technology (STIRPAT) framework, for a panel of 86 developing countries. Findings revealed that national institutions facilitate outward FDI reverse technology spillover effects to reinforce its effectiveness in mitigating carbon emission via environmentally friendly technologies. However, high human capital level shows to strengthen the quality of home country institutions which in turn facilitate more outward FDI spillover that improves environmental quality. Furthermore, overseas direct investment spillovers promote high human capital level in home countries to encourage green technological capabilities and innovations that boosts cleaner production strategies toward environmental sustainability goals. The study supports Environmental Kuznets Curve (EKC) hypothesis which validates the non-monotonic inverted-U-shape relationship between CO2 emissions and per capita GDP. On policy recommendation, developing countries should prioritize human capital development and update local institutions to facilitate new and advanced technologies that enhances sustainability.