Examining the moderating role of environmental regulations on financial development and ecological footprint in the MENA region

Zhou D., Saeed U. F., KONGKUAH M., Wiredu I.

Environment, Development and Sustainability, 2024 (SCI-Expanded) identifier

  • Publication Type: Article / Article
  • Publication Date: 2024
  • Doi Number: 10.1007/s10668-024-05430-7
  • Journal Name: Environment, Development and Sustainability
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Scopus, International Bibliography of Social Sciences, PASCAL, ABI/INFORM, Agricultural & Environmental Science Database, Aquatic Science & Fisheries Abstracts (ASFA), BIOSIS, Business Source Elite, Business Source Premier, CAB Abstracts, Geobase, Greenfile, Index Islamicus, Pollution Abstracts, Veterinary Science Database, Civil Engineering Abstracts
  • Keywords: Ecological footprint, Environmental regulation, Financial development, Foreign direct investment, MENA
  • Çanakkale Onsekiz Mart University Affiliated: Yes

Abstract

This study investigates the moderating impact of environmental regulations (ER) on the relationship between financial development (FD), foreign direct investment (FDI), and ecological footprint (EF) within the frameworks of the Environmental Kuznets Curve and Porter's hypothesis. The problem addressed is the dual challenge of fostering economic growth through FD and FDI while mitigating environmental degradation in the MENA region. The aim is to understand how ER can balance these dynamics. Utilizing panel data from 18 MENA countries spanning 1990–2022, the study employs Dynamic Common Correlated Effects and Pooled Mean Group estimations for the empirical analysis. Our results reveal that all three FD indicators—financial development of the banking sector, financial sector, and private sector—are associated with a reduction in EF. FDI outflows also contribute to lowering the EF, whereas FDI inflows have an adverse effect, increasing EF. A curvilinear relationship is observed among FD, FDI, and EF, indicating that while the initial impact is positive, it diminishes beyond a certain threshold. Importantly, ER is found to positively influence the relationship between FD, FDI, and EF, mitigating negative environmental impacts. GMM modeling was applied in the study to handle issues of endogeneity. The findings highlight the necessity for policymakers to prioritize and enhance ER and policies to achieve Sustainable Development Goals. Strengthening ER can ensure that economic development via FD and FDI does not come at the expense of environmental sustainability.