Financial Development, Foreign Direct Investment, and CO2 Emissions Nexus: Evidence from Sub-Saharan Africa
Abstract
Studies investigating foreign direct investment in Sub-Saharan African countries focused on the effect on financial development, while ignoring the contributive effect of CO2 emissions and green energy. This study empirically expands its frontier to capture the long-run causal nexus between foreign direct investment and financial development on CO2 emissions and green energy in 47 Sub-Saharan African countries from 1999 to2022 as its primary objectives using the pooled mean group and Dumitrescu and Hurlin panel causality tests. The 47 countries in Sub-Saharan Africa were decomposed into lower-middle, upper-middle, and low-income countries. Empirical results show that financial development positively and significantly influences green energy consumption in sub-Saharan Africa and in various income-level countries. In low-income sub-Saharan African countries, CO2 emissions and financial development had a positive but non-significant long-run nexus. In lower-middle-income SSA countries, CO2 and financial development had a negative and significant nexus. GDP per capita in sub-Saharan African countries and low-income sub-Saharan African countries positively impact green energy. On the contrary, in lower-middle and upper-middle sub-Saharan African countries, the long nexus with green energy is inversely related. The positive long-run nexus between GDP per capita and green energy consumption could be attributable to the fact that most sub-Saharan African countries are not highly industrialized Hence, the heavy reliance on undeveloped machines encourages green energy adoption compared with lower-to upper-middle-income sub-Saharan African countries, where industrialization is the fulcrum of their economic expansion. The research findings support the Pollution Halo Hypothesis and Patrick’s stage of the development hypothesis.
Keywords: CO2 emission, green energy consumption, foreign direct investment, sub-Saharan Africa, financial development.
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