Does Institutional Quality Mitigate the Effect of Foreign Direct Investment on Environnemental Quality: Evidence of MENA Countries

Foreign direct investment plays a catalyst role for economic growth in developing countries. However, FDI brings pollutant industries that deteriorate the environment quality in developing countries, especially in MENA countries. For this reason, these countries are trying to strengthen their environmental measures. The aim of this study is to examine the moderating role of institutional quality on the relationship between foreign direct investment and environmental degradation in 17 Middle East and North African (MENA). We use ordinary least squares (OLS), fixed effects (FE), random effects (RE), and system generalized moments method (S-GMM) over the period 1996–2018. Six dimensions of governance are used, namely, control of corruption, voice and accountability, rule of law, regulatory quality, governance effectiveness, and political stability. Our findings show that, first, FDI increases CO2 emissions in the MENA countries. Second, the effect of FDI on environmental degradation can be ameliorated through the presence of good institutional quality. In fact, FDI accompanied by good governance could reduce the adverse effects of CO2 emissions in MENA countries. It is recommended to implement efficiently good institutions that will help to reduce carbon dioxide emissions.