BANKING ACADEMY FACULTY OF INTERNATIONAL BUSINESS GRADUATION THESIS THE IMPACT OF FDI AND CO₂ EMISSIONS ON ECONOMIC GROWTH IN SOUTHEAST ASIA Student’s name : Nguyễn Vũ Minh Khuê Class : K24KDQTA Student ID : 24A4050125 Supervisor : MSc. Vũ Thuỳ Linh Hanoi, April 2025 ii DECLARATION OF ORIGINALITY I hereby declare that this graduation thesis is my own original work, carried out under the academic supervision of MSc. The data, materials, and research results presented in this thesis are truthful and have not been previously published in any other research work. I also affirm that all citations and references in this thesis comply with legal regulations and the academic integrity policies of Banking Academy.
In the event of any errors or violations being discovered, I shall take full responsibility before the law and Banking Academy. Nguyễn Vũ Minh Khuê. iii ACKNOWLEDGEMENT First and foremost, I would like to express my sincere gratitude to all the lecturers who have enthusiastically guided and supported me throughout the process of completing this graduation thesis. Thanks to their dedication and encouragement, I was able to accomplish this project in the best possible way.
I would also like to extend my heartfelt thanks to the Board of Management and the faculty members of Banking Academy, who have imparted valuable knowledge and skills to me during my academic journey. My deepest appreciation goes to my thesis supervisor, MSc. Vũ Thùy Linh, from the Faculty of International Business, Banking Academy, for her dedicated guidance, support, and encouragement throughout the entire research process. I am truly grateful to my family and friends who have always supported and motivated me, both mentally and emotionally.
I also greatly appreciate the enthusiastic assistance and provision of information and materials from lecturers, staff, and others who contributed to my research process. Due to the limitations in time, experience, and the broad scope of the topic, shortcomings in this thesis are inevitable. I sincerely welcome all comments and suggestions from lecturers and readers to help me improve and perform better in future professional endeavors. Thank you very much! iv TABLE OF CONTENTS DECLARATION OF ORIGINALITY.
iii TABLE OF FIGURES. vii TABLE OF APPENDIX. viii LIST OF ABBREVIATIONS. Foreign Direct Investment.
The Impact of FDI and CO₂ Emissions on Economic Growth. Research Subjects and Scope. Structure of the Thesis .13 Chapter 1: THEORETICAL FOUNDATION ON FDI, CO₂ EMISSIONS, AND THE IMPACT OF FDI AND CO₂ ON ECONOMIC GROWTH. Foreign Direct Inestment.
Types of FDI. Functions of FDI. Criteria for Evaluating FDI in a Country. Definition of CO₂ Emissions.
The Impact of CO₂ Emissions. Methods for Measuring CO₂ Emissions. Criteria for Assessing National CO₂ Emissions. Definition of Economic Growth.
The Role of Economic Growth. Key Growth Factors of Economic Growth. Methods of Measuring Economic Growth. The Impact of FDI and CO₂ emissions on Economic Growth.
Impact of FDI to Economic Growth. Impact of CO₂ Emissions to Economic Growth.36 Chapter 2: RESEARCH METHODOLOGY AND DATA COLLECTION. Overview of Research Models and Rationale for Model Selection. Research Model and Hypotheses.
Proposed Research Model. Description of Variables in the Research Model. Data Type and Scope. Data Validity Check.
Data Processing Methods .51 Chapter 3: EMPIRICAL RESULTS. The reality of EG, FDI and CO₂ emissions. The reality of Economic Growth. The reality of FDI.
The reality of CO₂ emission. Analysis of Correlation Between Variables. Cross-sectional Dependence Test. Regression Analysis Results.
FDI and CO₂ Emissions .80 vi Chapter 5: SOLUTIONS AND POLICY RECOMMENDATIONS. Economic growth orientation, FDI trends, and CO₂ emissions in Southeast Asia 81 5. Economic growth orientation in Southeast Asia. FDI trends in Southeast Asia.
CO₂ emissions in Southeast Asia. Solutions for Countries with High CO2 Emissions. Solutions for Countries with Low CO2 Emissions. Control CO₂ emissions and Promote a Green Economy.
Maintain Low Inflation for Macroeconomic Stability .101 vii TABLE OF FIGURES Table 2.1: Description of Variables Used in the Research Model .1: Economic growth statistics of Southeast Asian countries (2001 – 2021) .2: Descriptive statistics of variables .5: Cross-sectional Dependence Test .7: Levin–Lin–Chu unit-root test.1: Compare the direction of impact of variables in the model with the expected direction .70 viii TABLE OF APPENDIX Appendix 1 .106 ix LIST OF ABBREVIATIONS Abbreviations Full Term CO₂ emissions Carbon Dioxide Emissions CPI Consumer Price Index FDI Foreign Direct Investment GDP Gross Domestic Product ICT Information and Communication Technology MNCs Multi-national Corporations ASEAN Association of Southeast Asia Nations R&D Research and Development USDA United States Department of Agriculture OECD Organization for Economic Cooperation and Development GMM Generalize Method of Moments 1 INTRODUCTION 1. Research Rationale In recent years, Southeast Asian countries have witnessed remarkable economic development, particularly in terms of GDP growth, expansion of manufacturing industries, and export performance. Foreign Direct Investment (FDI) plays an essential role in the region’s development strategy, serving as a major driver for increasing investment capital, creating employment, transferring advanced technologies, improving management capabilities, and accelerating the industrialization process. FDI not only contributes to economic growth but also offers opportunities for countries in the region to access modern technologies, enhance labor productivity, and develop infrastructure.
However, accompanying economic growth and the expansion of production activities are negative impacts on the environment, especially the emission of greenhouse gases, with CO₂ standing out as a major contributor to global climate change. The increasing production and energy consumption have significantly contributed to the rise in CO₂ emissions across the region. Although efforts have been made by the countries to mitigate environmental degradation, pollution levels remain high and are expected to continue rising. According to the Global Carbon Atlas, total CO₂ emissions in Southeast Asia exceeded 1.7 billion tons in 2024, accounting for approximately 4.2% of global emissions and showing a rising trend in the coming years.
Simultaneously, according to UNCTAD, total FDI inflows into the region in 2024 were estimated to exceed USD 234 billion, indicating the large scale and rapid pace of FDI attraction. This situation highlights the urgent need to examine the relationship between FDI, CO₂ emissions, and economic growth, in order to help countries formulate and implement green and sustainable economic development policies. As Southeast Asian countries strive to meet global climate commitments, particularly the goal of achieving net-zero emissions by the mid-century, the study and implementation of appropriate policies to balance economic development with environmental protection have become more crucial than ever. These countries not only face the challenge of attracting FDI but must also ensure that the process of economic 2 growth does not exacerbate environmental pollution.
Therefore, pursuing a sustainable development path that combines economic growth with environmental preservation is a critical objective for countries in the region. From an academic perspective, the relationship between FDI, CO₂ emissions, and economic growth has been discussed in many international studies. However, few studies have integrated all three factors into a single empirical analysis model. Some research suggests that FDI may have a positive impact on the environment by facilitating the transfer of advanced technologies, thereby reducing CO₂ emissions (the "technique effect").
On the other hand, several studies argue that FDI can worsen pollution levels if host countries implement lax environmental regulations, resulting in the so-called "pollution haven" phenomenon. In such cases, companies may exploit less stringent environmental rules to conduct polluting production activities. Nevertheless, in the context of Southeast Asia, comprehensive studies that simultaneously incorporate FDI, CO₂ emissions, and economic growth remain limited. Some studies only explore the relationship between FDI and economic growth, or between FDI and CO₂ emissions, but few have analyzed all three variables within a unified empirical framework.
This creates a research gap that needs to be addressed in order to gain a clearer understanding of how FDI influences both environmental and economic dimensions - ultimately providing valuable insights for designing sustainable development policies in the region. Therefore, this topic has been selected to contribute additional empirical evidence specific to Southeast Asia and to help narrow the existing research gap. Studying the relationship between FDI, CO₂ emissions, and economic growth will enable countries in the region to gain a more comprehensive understanding of how FDI affects these two critical aspects and to develop sustainable economic policies while tackling urgent environmental challenges. In conclusion, driven by the urgent demands of real-world economic development and environmental protection in Southeast Asia, and in light of the current academic research gap, the topic "The Impact of FDI and CO₂ emissions on Economic Growth in Southeast Asian Countries" is a relevant and timely research direction.
This topic holds not only scientific significance but also high practical applicability, 3 supporting countries in the region in their efforts to develop sustainable economic strategies and effectively address escalating environmental issues. Research Objectives The primary objective of this study is to examine the impact of FDI and CO₂ emissions on economic growth in Southest Asia countries. Explore the theoretical framework regarding the relationship between FDI, CO₂ emissions and economic growth. Analyze the current situation and develop a quantitative model to assess the impact of FDI and CO₂ emissions on economic growth in the Southeast Asian region.
Propose solutions and recommendations to promote economic growth based on the results of the model analysis and the findings from the current situation. By addressing these objectives, this research aims to fill gaps in the existing literature and provide policy recommendations for achieving sustainable economic growth in the Southest Asia countries. Foreign Direct Investment Theoretically, FDI inflows are considered to have a positive impact on the overall economic growth of the host country; however, empirical findings remain inconclusive. Several empirical studies have identified FDI inflows as a driver of economic growth (Ahmed, 2018; Ibrahim & Acquah, 2021; Rao et al.
Conversely, other researchers (Golitsis et al., 2018; Jilenga et al., 2016; Musibah et al., 2015) have highlighted the negative impact of FDI inflows on the economic performance of host countries. Meanwhile, some studies suggest that FDI inflows have an insignificant effect on a country's economic growth (Alvarado et al., 2017; Carkovic & Levine, 2005; Zhang et al. A likely explanation for the inconsistent empirical findings on the FDI-growth relationship is the reliance on total FDI inflows, as noted in the works of Alfaro and Charlton (2013), and Nunnenkamp and Spatz (2004). Most empirical studies focus on aggregate FDI inflows, even though the growth effects of FDI are expected to differ depending on the sector that receives the investment.
For example, FDI-related 4 knowledge and technology transfers, along with the adoption of new practices, tend to be more prominent in the manufacturing sector compared to other sectors of the economy (Chakraborty & Nunnenkamp, 2008). The potential growth effects of foreign investment are also likely to vary across the primary, secondary, and tertiary sectors (Wang, 2009). Alfaro (2003) pointed out that foreign technological and know-how transfers, as well as the introduction of new products, primarily occur in the manufacturing sector. Therefore, manufacturing-FDI plays a more significant role in promoting economic growth.
Manufacturing-FDI mainly involves the transfer of 'hard technology,' such as machinery and industrial operations, which is expected to boost overall productivity by generating positive externalities (Doytch & Uctum, 2011). Chakraborty and Nunnenkamp (2008) examined the growth impact of services-FDI and noted that, compared to the manufacturing sector, the potential for spillovers and linkages between local and foreign firms is more limited in the services sector due to the restricted possibilities for breaking down production into various stages. Nevertheless, Aykut and Sayek (2007) argued that if FDI in the services sector improves service quality in a country, it can positively influence the productivity levels of all related sectors. There is a lack of empirical research focused on assessing the growth impacts of agriculture-FDI, and existing findings remain inconclusive.
For instance, Hallam (2011) suggested that the positive effects of agriculture-FDI depend on various factors, such as the type of agricultural commodity, and the institutional and regulatory frameworks.
