Reinvestigating the Presence of Environmental Kuznets Curve in Malaysia: The Role of Foreign Direct Investment

Abstract

Over the past forty years, Malaysia has achieved tremendous economic growth because of higher investment from foreigners such as China, Japan, and the US. Many multinational companies (MNC) have allocated their factories, especially in more developed states such as Selangor, Penang and Johor, to focus on their operation. The country can receive various benefits from this investment in job creation, technological advancement, and better income distribution. However, at the same time, negative externalities such as environmental degradation can also occur from those operations. Given this situation, it is interesting to investigate Malaysia’s current state of sustainable development by considering the impacts of FDI. This paper focused on investigating the presence of the Environmental Kuznets Curve (EKC) and Pollution Haven Hypothesis (PHH) for Malaysia using a latest annual dataset from 1971 to 2019. The study used the Bound test to determine the impact of FDI and other selected macroeconomic variables on environmental quality proxied by Carbon emission (CO2 ). The outcomes show that the country showcased the U shape of EKC, and higher FDI inflows have worsened the country’s environmental pollution. These outcomes posit a bad alarm for the country’s policymakers to be more aware of the consequences of development that cause higher carbon emissions release and how MNC in the country contributes to more emissions by worsening the scenario. Therefore, heavy environmental rules should be imposed on foreign investors. Furthermore, the country needs to be directing their economic development by following the principles set out by United Nations in pursuing sustainable development.