Investigating the role of institutions in the FDI-ecological footprint linkage in Sub-Saharan Africa: is there a threshold for institutional quality?

Abstract

This study employed the system generalised method of moment technique to examine the role of institutions in the Foreign Direct Investment – ecological footprint linkage for 40 Sub-Saharan African countries between 2004 and 2018. Some stylised facts about the level of exposure of Sub-Saharan African countries to environmental degradation and the rise in Foreign Direct Investment inflow into this part of the continent were provided. Empirical results showed that institutions in this area are weak and contribute to environmental degradation. Even though we found Foreign Direct Investment to improve the environmental quality, institutions create a negative link between Foreign Direct Investment and ecological footprint. This resulted in Foreign Direct Investment exerting an adverse effect on the environment. Likewise, findings showed that while economic growth contributes to the reduction of ecological footprint at low levels of growth, it increases ecological footprint at higher levels of growth. The study re-asserts the vital role of institutions in achieving a sustainable environment and suggests policy recommendations for strengthening institutions.