Analysing the influence of foreign direct investment and urbanization on the development of private financial system and its ecological footprint

Abstract

In this research, the objective is to examine how private financial development, urbanization and foreign direct investment and economic growth affects the environment using the ecological footprint as an indicator. Panel data was used for 100 countries from 1980 to 2019, classified according to their income level. Several econometric steps were used to estimate the results, such as cointegration and causality techniques. The results show that the private financial system and environmental degradation have a long-term equilibrium relationship, and the incidence is positive, but not significant at the level of the 100 countries. In high-income countries, the private financial system reduces environmental degradation; however, in upper middle-income, lower middle-income and low-income countries, it increases in the long run. Likewise, urbanization plays a predominant role on the ecological footprint in the long term. Meanwhile, the role of foreign direct investment is not stable over time. The causality test shows bidirectional causality between environmental degradation and the private financial system at the global level in high- and upper middle-income countries. However, low-income countries have a unidirectional relationship of environmental degradation to the private financial system. With regard to foreign direct investment, there is a unidirectional causal relationship between environmental degradation and foreign direct investment at the global level and from foreign direct investment to environmental degradation in high-income countries.

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