Trading-off between being contaminated or stimulated: Are emerging countries doing good jobs in hosting foreign resources?

This study explores the linear and nonlinear relationship between Foreign Direct Investment inflows (FDI), economic development, national governance, public policies, and carbon risk in emerging countries. Utilizing the panel data of 62 emerging economies from 1990 to 2020, we confirm the inverted-U-shaped relationship of the Environmental Kuznets curve (EKC) between carbon risk and economic development. The results posit robust evidence for the positive impact of FDI inflows on carbon risk in developing economies. Further, the enhancement of governance in developing nations can synchronously lower the carbon risk and the destructive collisions of FDI on the environment in the host countries. We further report that fiscal policies regarding higher tax and public expenditure can relatively reduce carbon risk and substantially reduce the pressure of FDI inflows on the environment degradation in the host countries. By utilizing the cointegrating nonlinear ARDL model, this study further enriches the literature by confirming the long-run symmetric and short-run asymmetric impacts of FDI inflows and economic growth on carbon risk. Overall, our findings highlight the critical roles of government in cautiously receiving FDI inflows and effectively supervising FDI businesses to minimize the negative impacts of this factor on the environment.