Trade Openness and the Impact of Foreign Direct Investment on CO2 emissions: Econometric Evidence from ECOWAS Countries

Abstract

This study examines the effect of trade openness on the relationship between foreign direct investment (FDI) and carbon dioxide emissions in ECOWAS Countries. It applies the bounds testing approach to cointegration to annual data covering the period 1970 to 2010. The empirical evidence supports the environmental Kuznets curve for four countries (Cote d’Ivoire, Gambia, Mali and Niger). In most cases, economic growth and population contribute to environmental degradation. More interestingly, the effect of FDI on CO₂ emissions is contingent on trade openness. This effect is positive and increases with the degree of trade openness in Burkina Faso, Gambia and Nigeria, suggesting that trade and FDI are complementary in worsening environmental quality. The effect of FDI decreases with trade in Ghana, Mali and Togo while in the case of Benin, Niger, Senegal and Sierra Leone, FDI has no significant long-run effect on CO₂ emissions.

Keywords: Foreign Direct Investment, CO₂ emissions, Trade openness, ECOWAS.