Re-investigating the linkages between FDI and export: The moderating roles of environmental regulation

This study examines the relationship between foreign direct investment (FDI) and exports in OECD countries, as well as the moderating effect of the stringency of environmental policy (SEP) on this relationship. We modified the most recent panel Granger causality method and threshold approach to conduct empirical analysis using data covering the period from 2000 to 2023. Empirical results reveal that only FDI stock has causality with exports, even with the moderating effect of SEP. Threshold regression analysis reveals the following direct, non-linear effects of SEP on FDI and exports, respectively. Lower SEP induces FDI inflows, but such inflows do not accumulate over time (deters FDI stock). Furthermore, although a higher level of SEP hinders FDI inflows, it appears to foster innovation, which in turn expands the existing stock of FDI. Moreover, at the lower regime, SEP has a significant adverse effect on all export types. However, at higher regimes, SEP facilitates all types of exports. The threshold regression analysis also shows the following effect of SEP on the FDI-export link. In the presence of lower SEP, exports (aggregate, agricultural, and manufacturing) attract both FDI flow and stock, except for oil/gas/coal exports, which deter it. In contrast, with the prevalence of higher SEP, all export types have a significant adverse effect on FDI stock and flow, except oil/gas/coal export, which has an appreciable positive impact on FDI. In addition, in lower SEP, FDI substitutes oil/gas/coal exports while complementing manufacturing and agricultural exports. In the presence of higher SEP, FDI stock and flow have a significant positive effect on oil/gas/coal export, while they have a significant adverse effect on aggregate export. The types of FDI have divergent impacts on agricultural exports. Therefore, this study fills the existing research gap by providing recommendations that will assist policymakers in designing optimal policies that balance trade, foreign investment, and sustainable development.